Agriculture in Peril: How Insurance Can Shield South American Farmers from Climate Risk

An IMF and Oxford study highlights how extreme weather, particularly droughts, is severely impacting South American agriculture, with losses reaching up to 19% in some regions. It underscores the urgent need for expanding agricultural insurance to mitigate risks, boost productivity, and enhance economic resilience.

A joint study by the International Monetary Fund (IMF) and Oxford University reveals the severe impact of extreme weather on South America's agriculture. The report, Extreme Weather Events, Agricultural Output, and Insurance: Evidence from South America, examines how droughts, floods, and erratic weather patterns threaten farming in Argentina, Brazil, Colombia, Peru, Paraguay, and Uruguay. With agriculture contributing an average of 8% to GDP and 40% of total exports in these nations, the sector's vulnerability to climate shocks is a significant economic concern. The study further explores the potential of agricultural insurance to mitigate financial losses, boost productivity, and enhance economic stability.

Droughts Are Devastating Farmers and Food Production

Climate change has led to more frequent and intense weather events, with droughts emerging as the most destructive force against agriculture. Using high-resolution satellite data, the researchers analyzed vegetation health through the Normalized Difference Vegetation Index (NDVI) and drought severity using the Standard Precipitation and Evapotranspiration Index (SPEI). Their findings reveal major disparities in how droughts impact different countries. Farmers in Argentina and Brazil suffer comparatively smaller losses of 1-2% in soybean production per drought event. However, in Paraguay and Uruguay, where droughts occur during critical planting periods, losses reach between 8% and 19%.

This stark variation is attributed to differences in farming techniques, soil quality, and access to climate adaptation tools. Farmers with irrigation systems and drought-resistant seeds can minimize their losses, while those relying on traditional rain-fed agriculture face greater risks. The timing of droughts is also crucial—when they strike during early planting seasons, crops fail before they can mature, causing irreparable economic damage.

Agricultural Insurance: A Powerful Yet Underutilized Tool

Despite the mounting risks, agricultural insurance remains severely underdeveloped in South America. Brazil leads the region with 20% of its farming activities insured, yet this is still insufficient given the scale of its agricultural sector. Paraguay, on the other hand, has an alarmingly low insurance penetration, covering just 0.6% of agricultural output. The study identifies several barriers preventing farmers from adopting insurance, including high premiums, lack of awareness, and weak risk assessment frameworks. Many smallholder farmers either cannot afford coverage or are unaware of the benefits insurance provides in stabilizing incomes during climate-related shocks.

From the perspective of insurers, limited meteorological and agricultural data make it difficult to design accurate policies. Additionally, the lack of strong reinsurance networks discourages global reinsurers from backing South American agricultural insurance programs. Without reinsurance support, local insurers remain reluctant to expand coverage, leaving vast numbers of farmers vulnerable to financial ruin following extreme weather events.

Insurance Can Unlock Higher Productivity and Economic Growth

The study employs a dynamic general equilibrium model to estimate the economic benefits of expanding insurance coverage. The results indicate that if insurance penetration were increased, agricultural productivity could rise by 7.5% in Paraguay, 2.7% in Brazil, and 3.6% in Uruguay. This boost in productivity stems from greater financial security, allowing farmers to invest more in fertilizers, improved seeds, and advanced irrigation technologies.

Beyond the farm level, broader insurance adoption would benefit national economies. Governments currently spend large sums on emergency relief efforts following climate disasters. By promoting insurance, they could shift toward a more proactive risk management strategy, reducing fiscal volatility. Additionally, financial stability would encourage private sector investment in agribusiness, fostering innovation, job creation, and overall economic growth.

Key Policy Recommendations to Strengthen Insurance Adoption

To improve agricultural insurance penetration, the study outlines several critical policy measures. First, South American governments should explore regional risk-sharing mechanisms modeled after successful initiatives like the African Risk Capacity and the Caribbean Catastrophe Risk Insurance Facility. These cooperative insurance pools distribute financial risks more evenly, making coverage more affordable for farmers.

Second, governments must enhance agricultural data infrastructure. Investing in advanced weather monitoring systems and historical yield databases would allow insurers to price risks more accurately, making policies more cost-effective. This improved data accessibility would also support the growth of index-based insurance products, which offer faster and more transparent payouts compared to traditional claims-based insurance.

Regulatory reform is another essential step. Governments should establish standardized contracts for index-based insurance, ensure fair and timely claim settlements, and introduce targeted subsidies to make premiums affordable for small farmers. However, subsidies should be carefully designed to avoid market distortions or moral hazard, where farmers take excessive risks assuming they will always be compensated.

Technology can also play a game-changing role in increasing insurance accessibility. Mobile banking platforms, satellite-driven assessments, and automated claims processing can significantly cut administrative costs, making insurance products more affordable. These digital tools would also enable insurers to reach remote rural areas where traditional financial services are scarce.

A Call for Urgent Action Amid Rising Climate Threats

The study makes a compelling case for treating agricultural insurance as a cornerstone of climate adaptation strategies. With extreme weather events becoming more frequent, governments, insurers, and international organizations must act swiftly to strengthen insurance systems, improve data collection, and reform regulatory frameworks. Without these efforts, millions of farmers will remain exposed to devastating climate risks, undermining food security and economic stability.

The global agricultural insurance market is projected to expand from $40 billion to $60 billion by 2030. South America has a crucial opportunity to leverage this growth by attracting investment, developing robust insurance programs, and integrating technology into risk management strategies. However, achieving meaningful progress will require close collaboration between the public and private sectors. If proactive measures are taken now, agricultural insurance can serve as a vital tool in shielding South America’s farming sector from the growing threats of climate change, securing livelihoods, and sustaining economic development.