Editing IPCC:AR6/WGII/Chapter-5 (section)

==== 5.14.1.3 Insurance as a climate impact risk management tool ====

<div id="h3-67-siblings" class="h3-siblings"></div>

Insurance is a financial adaptation strategy increasingly used in agriculture and aquaculture. A relatively new approach to agricultural insurance risk is the use of financial derivative products, such as index-based agricultural insurance (IBAI), marketed by financial institutions to farmers to help them deal with weather-related production risks ( [[#Isakson--2015|Isakson, 2015]] ; [[#Jensen--2017|Jensen and Barrett, 2017]] ). The basic idea is to rely on easily observed weather indices, such as precipitation or temperature, that co-vary with farm production. Insurance payments are received when the metric trigger for a region is reached, eliminating the need to collect farm-specific information. Proponents of index insurance argue that it can resolve the information costs and incentive problems inherent in rural financial markets, such as adverse selection, and allow provision of insurance coverage at a fraction of the costs of loss-based polices ( [[#Jensen--2017|Jensen and Barrett, 2017]] ). Buyers of index policies do not have to prove their ownership of assets with weather-related losses. This lowers transactions costs and makes it more affordable to insure small plots of land.

The creation of index insurance requires significant prior research and extensive data that may not be available or sufficient in lower-income countries, including identifying the most appropriate farm and climate variables to include and financial and regulatory support from the public sector ( [[#Economic%20Commission%20for%20Latin%20America%20and%20the%20Caribbean%20and%20Central%20American%20Agricultural%20Council%20of%20the%20Central%20American%20Integration%20System--2013|Economic Commission for Latin America and the Caribbean and Central American Agricultural Council of the Central American Integration System, 2013]] ; Economic Commission for Latin America and the Caribbean and System, 2014). Some insurance providers bundle it with other services, such as fertilizer use or seeds that may not be useful to particular farmers and can increase their overall capital costs ( [[#Isakson--2015|Isakson, 2015]] ). Although proponents see IBAI as a way to mitigate farmers’ risks associated with more variable weather patterns ( [[#Greatrex--2015|Greatrex et al., 2015]] ), critics argue that derivative-based insurance products tend to benefit wealthier farmers and fail in assisting the poorest and most marginalised farmers ( [[#Isakson--2015|Isakson, 2015]] ; [[#Taylor--2016|Taylor, 2016]] ). Thus far, there is ''low agreement'' and ''medium evidence'' regarding the adaptation potential of derivatives-based insurance products, signalling a need for further research in this area.

<div id="5.14.1.4" class="h3-container"></div>

<span id="community-based-adaptation-approaches"></span>