Insurance as a financial ark: Adapting to extreme weather for farmers and agriculture

Climate risks present significant challenges to agriculture and the welfare of farmers in rural communities. This work aims to unveil the role of insurance as a financial ark in navigating the threats posed by extreme weather events to the income stability of farmers. We analyze a panel dataset covering 318 Chinese prefectural-level cities from 2014 to 2024. This dataset integrates station-level daily precipitation records with socioeconomic indicators manually compiled from local statistical yearbooks. Using a two-way fixed effects regression model to control for unobserved city-specific heterogeneity and common time trends, we find that extreme weather events significantly reduce farmers’ incomes, while agricultural insurance emerges as a stabilizer that compensates farmers for these losses. Although insurance does not mitigate the losses by offsetting the decline in agricultural output caused by extreme weather, it aids in climate risk adaptation by encouraging farmers to seek alternative income sources, particularly through temporary labor migration. These findings highlight the role of insurance in ensuring the financial resilience of farmers amid climate change risks, but also call for reforms in agricultural insurance to enhance its capacity to safeguard crop production.