Trading Against the Storm: Can Index Insurance Smooth Climate Risk?

Policy Context

Agriculture accounts for about 23% of Pakistan’s GDP and employs over a third of the labor force. Nearly half of Pakistan’s land is utilized for farming, yet over 92% of farmers cultivate less than 12 acres (Pakistan Agricultural Coalition, 2025; Food and Agriculture Organization, n.d.), making the sector highly reliant on smallholders. Most smallholders already operate on thin margins, and increasing weather variability further exacerbates their financial instability. As these shocks become more correlated and frequent (defining features of climate change), they undermine both agricultural productivity and traditional informal risk-sharing networks (Kochar, 1999; Mobarak and Rosenzweig, 2013). In the absence of formal crop insurance markets, these shocks not only reduce farm incomes and food security in the short run but also deter longer-term investments in agriculture (Karlan et al., 2014; Cai, 2016; Jensen and Barrett, 2017). 

Given these risks, it is essential to evaluate whether financial protections can lessen their impact and to what degree. Traditional indemnity-based insurance products are challenging to scale in smallholder settings due to the high costs of verifying farm-level losses. In contrast, index-based insurance, particularly area-yield index insurance, offers a more scalable alternative. These products trigger payouts when the average yields in a defined region fall below a historical threshold. The Government of Punjab has adopted this approach in its crop insurance scheme.

Study Design

The Punjab Crop Insurance Program (PCIP) provided fully subsidized area-yield index insurance to smallholder farmers growing wheat, rice, and cotton. The staggered rollout of the program across years, crops and sub-districts creates variation that this study exploits to estimate the causal impacts of insurance. This analysis combines administrative and secondary (satellite products, household surveys, and weather data) to evaluate the effects of formal crop insurance on agricultural productivity, input/output prices, and adaptation investments. 

Results and Policy Lessons

This pilot is ongoing and findings are forthcoming.