Managing Drought Risk with Parametric Insurance: Addressing Food Insecurity in Senegal

Agricultural production is highly sensitive to drought and extreme droughts are projected to increase globally in both frequency and severity. Agriculture accounts for more than 80 percent of drought related economic losses, estimated at USD 29 billion, globally. For subsistence farmers, timely financial assistance is critical to prevent prolonged income losses and worsening food insecurity. Parametric insurance helps address this need by triggering rapid payouts based on objectively measured and observed climatic conditions- rather than post-event loss assessments- thereby enabling faster and more predictable compensation.

This study develops a parametric insurance framework to protect vulnerable subsistence farming communities in Senegal against extreme drought and the resulting food insecurity. Agriculture contributes significantly to Senegal’s economy and employs a large share of the population, making the sector and population at large highly exposed to drought risk. The framework uses the Standardized Precipitation Evapotranspiration Index (SPEI) as the primary drought indicator, adjusted for vulnerable population density and crop-specific coefficients to better reflect water requirements across growth stages.The climatic variables used demonstrate a clear relationship with observed yield reductions during drought events. Different SPEI time scales (3, 6,12-months and combinations thereof) are tested against crop calendars and regional climatology to select the most suitable index structure for payouts triggering.

Payout structures are calibrated using historical yield data, food insecurity reports and estimates of affected populations to reduce basis risk. Ground validation and actuarial analysis strengthen the reliability of the index and its link to actual losses, thereby improving payout accuracy. This approach demonstrates the potential of parametric insurance as a scalable and practical tool for managing climate-related agricultural risks and supporting resilience among vulnerable farming communities.