Assessing drought-indexed insurance for irrigation communities under climate uncertainty: A case study from Mediterranean agriculture

Climate change and increasing extreme events challenge food production due to the growing volatility of agricultural revenues. In water-scarce regions, farmers are exposed to hydrological droughts due to their dependence on regulated water systems. We assess how drought-indexed insurance could reduce income shocks for irrigation communities affected by climate change, in particular in the largest citrus-growing area in the EU (Valencia province).

Our analysis revealed insurance configurations that could be attractive to both farmers and insurers across surface and mixed water demands. However, their suitability depends on the climate change scenario. Tailoring the insurance design to the official State Drought Index of the area (Jucar River Basin) aligns the probability of receiving an indemnity with drought severity and the premiums paid. We also demonstrate that public sector participation would be crucial to achieving robust, efficient insurance schemes, given issues of insurance affordability among farmers and uncertainties in insurers' revenues.