Climate risk, policy, and insurance: a forecast-based model for weather index design in vulnerable economies

Climate volatility poses significant risks to agricultural livelihoods, particularly in emerging economies where access to formal risk management instruments is limited. Weather index insurance has been promoted as a scalable solution, yet adoption rates remain modest due to inadequate targeting and limited policy support. This study proposes a two-stage methodology to assess both the technical design of indices and the economic drivers of adoption among smallholder coffee farmers. In the first stage, we adapt a low-basis-risk insurance model using forecast-based weather variables to approximate yield losses in contexts with minimal historical records. In the second stage, we embed these pricing results into an influence diagram framework that links weather volatility with income variability, crop prices, and subsidies, thereby modeling farmers’ decision-making under uncertainty. Results show that although the insurance is actuarially sound and provides positive expected payoffs (about 40 USD/month), adoption is highly context-dependent. Uptake remains low (16%) under moderate weather but increases to 48% under stressed climate scenarios defined by higher variance in the weather index and shifts in crop prices, particularly when subsidies exceed 50%. These findings emphasize the importance of adaptive subsidy schemes and context-appropriate index design, offering practical guidance for strengthening climate resilience in rural economies facing growing weather volatility.