Risk transfer and financial instruments such as climate risk insurance have been highlighted in the Agenda 2030 for sustainable development, the Sendai Framework, the Addis Ababa Action Agenda and the Paris Agreement as a response to the increasing extreme weather events and climate-related disasters in recent years. The years2014,2015, 2016 and 2017 are the four hottest years on record (WMO, 2018).These rising temperatures and increasesin extreme weather events will disrupt agricultural systems and strain food production in the agriculture sector, due to thesector’s sensitivity to weather variability (WEF, 2018).In addition, nearly 2.5 billion people worldwide depend on the agriculture sector and its subsectors−crop, livestock, fisheries and forestry−as their main source of livelihoods (FAO,2016). The report further statesthat the sector and subsectors incurred approximately $93 billion-worth of losses due to climate-related disasters between 2005 and 2014. The cascading effect of negative impacts goes beyond economic losses, to include impacts such asdestruction of crops and farming equipment. These impacts lead to indirect consequences, such as unemployment for farm labourers, increased imports of food and agricultural commodities, and low food availability in local markets resulting in food-price inflation.
In 2015, the convergence of the a forementioned international policy agendas called for different actors to come together and rethink future finance by determining what is at risk, how to reduce these risks, which financial instruments can address residual risks and how best to prepare for disaster events. Thus,this createsan opportunity to consider risk transfer solutions, such as agricultural insurance, during the early planning stages of disaster risk management and climate change adaptations in order tobuild aresilientpathway. At the sametime, climate change impacts make some risks less likely to be insured. Nevertheless, failure to make adequate financial provisions against extreme weather events may bear heavy costs for individual producers, agricultural enterprises and governments as well as have longer-term economic consequences. Therefore, to foster food production and climate-resilient investment across the agricultural sector and its value chain, effective agricultural risk management is needed through a paradigm shift in market development, policy and institutional reforms.
However, to date suitable insurance coverage against losses and damages caused by extreme weather events and climate-related disasters is still widely unavailable due to a number of reasons. This remains the case eventhough insurance developed for the agricultural sector seeks to avoid key challenges, such as underwriting and administrative costs, as well aspay-outdelays, that a rise from traditional insurance approaches. Nevertheless, only twoper centof weather-related losses incurred between 1980 and 2015 in developing countries were covered by insurance, and merely 100 million people in Africa, Asia and Latin America combined have some for of insurance coverage (BMZ, 2015).