Across the island, rising day- and night-time temperatures, pests and diseases, soil degradation, salinity, loss of ecosystem services, and human-wildlife conflict affect lives and livelihoods, particularly in farming communities.
These climate-related hazards interact with existing vulnerabilities and sensitivities to create increasingly complex and compound risks. This includes interactions between climate- and non-climate-related risks, such as market risks, operational risks, property risks, health risks, and risks faced by other actors along the supply chain.
“In our area, rains generally used to start in August, and rainfall in December was heavy,” says Chandra Galagoda, a farmer from Trincomalee, one of Sri Lanka’s dry zone districts. “During that time, paddy lands were cultivated. But now, rains do not come on time as before.” The heightened uncertainty of weather patterns can have devastating impacts, as S. Chandralatha, another farmer, points out: “Our field was affected by drought as well as pests and diseases. We were unable to save the paddy and incurred serious losses, about one third of the harvest.”
If climate-related risks and impacts are not addressed, they can severely affect agricultural livelihoods and offset efforts of poverty alleviation. Climate hazards threaten the entire cropping cycle from pre-sowing to post-harvest, including prevented sowing and mid-season adversities, and affect farmers, input providers, rice millers, transporters, storage facility owners, wholesalers, retailers, and consumers, potentially causing ripple effects throughout the economy.
In this increasingly difficult environment, how do Sri Lanka’s farmers manage risk and build resilience? Despite limited formal financial literacy, farmers have traditional ways to address shortages in finance, including formal and informal loans, borrowing, pawning jewelry and other belongings, diversification into small businesses or integrated crop-livestock systems, finding additional income sources through rural-urban migration in off-seasons, or liquidation of assets such as livestock.
Agricultural insurance is a form of risk management, or more precisely a risk transfer mechanism. It reduces uncertainties for farmers by shifting part of their risk to the insurer, be it the government, a private company, or global financial markets. Instead of having to allocate large, unexpected funds on short notice to address climate impacts or disasters, farmers only pay a regular, clearly defined premium that entitles them to compensation payouts in case of an event or loss of yield. For such a mechanism to be successful, the premiums, payout triggers, and compensation payments need to be satisfactory to all parties and proportional to the scale and probability of impacts.
To take risk away from individual farmers and distribute it among the entire population, Sri Lanka has established crop insurance schemes as early as 1958, more than half a century ago. The government has piloted the first such scheme, which was institutionalized and scaled up over the following years and decades. As of now, it covers all registered farmers on the island for six basic crops (paddy, maize, soybean, big onion, potato, and chilies) for free and protects them against floods, droughts, dry spells, excess water, pests and diseases, and wild elephant attacks. Farmers can pay an additional premium to insure further crops as well as livestock, agricultural equipment and implements, storage facilities, and accidents/health.
The modalities of this insurance have changed over the years, but currently it is linked to the government’s fertilizer subsidy programme. This system functions automatically and does not require high financial literacy from farmers; however, it can also cause farmers to not be fully aware of the insurance mechanism. Furthermore, since insurance is tied to fertilizer distribution, only farmers who are registered and eligible to receive fertilizer are covered.
“Alongside the fertilizer subsidy, farmers automatically receive insurance,” says R.R. Ilangarathna, a farmer from Trincomalee. “However, those who do not receive fertilizer subsidy are not entitled to this and must get a private insurance, of which I am not much aware.”
Due to the indemnity-based nature of the compulsory crop insurance scheme, damages need to be assessed by extension officers and calculated according to the cultivation stage and impacts, leading to a delay between loss and payouts that farmers can have difficulties in understanding. The Agriculture and Agrarian Insurance Board is working on a weather-index based insurance and has already rolled out a pilot scheme in some parts of the country.
“Expanding weather index-based crop insurance schemes could help farmers to better manage risk,” explains Dr. Ranjith Punyawardena, one of the leading experts on agriculture in the country. “It is also important to strengthen farmer organizations to enhance their bargaining power and increase the engagement of women in the sector.”
In addition to the government scheme, there are several private sector entities involved in climate risk transfer schemes. According to the Insurance Regulatory Commission of Sri Lanka, there are currently 27 registered insurance companies, 68 registered insurance brokers, and 23 registered loss adjusters, some of which offer crop insurance to farmers. However, penetration of private sector crop insurance has remained comparatively low since the market was opened to private companies in the 1990s.
At first glance, insurance solutions are straightforward: the insured party pays premiums, the insurer pays another premium to a reinsurer to further outsource the risk, and in case of a trigger event the payment chain reverses order in the form of compensation. In Sri Lanka, the public crop and livestock insurer is the Agriculture and Agrarian Insurance Board, which is reinsured through the country’s sole reinsurer, the government-run National Insurance Trust Fund (NITF).
However, farmers and insurers are just two nodes of an intricate web that spans across Sri Lanka’s food systems and agricultural economy. Other financial institutions play a key role, for example when they require insurance cover to grant loans or when they reduce risk by developing strong relationships with suppliers. Risk assessments and insurance calculations also depend on the availability of data, which is provided by entities such as the Department of Meteorology, the Irrigation Department, or the Department of Agriculture, all of which operate weather stations or rainfall gauges across the island.
Along the supply and value chain, different actors face different risks. While farmers are the ones most affected by changes in weather patterns, unseasonal heavy rain, or prolonged dry spells, a host of other livelihoods indirectly depends on them as well. From farm laborers to lorry drivers and rice millers to wholesalers, climate risk—and therefore risk transfer—is relevant and affects the food system as a whole, not just its individual actors.
One level higher, policymakers and regulators create the enabling environment for both farmers and insurance companies. In Sri Lanka, climate insurance is included in the national policy framework “Vistas of Prosperity and Splendour,” in policies such as the National Agriculture Policy of 2021, and in the Nationally Determined Contributions under the Paris Agreement. Beyond the agriculture sector, the country also has a National Natural Disaster Insurance scheme, a loan protection scheme for financial institutions, and social protection systems such as Samurdhi.
Insurance can build resilience of agricultural communities and help them cope with emerging risks. It aligns directly with Sustainable Development Goals 1 (no poverty) and 13 (climate action) and is highly relevant for Goal 2 (zero hunger) as well. In Sri Lanka, there is scope to optimize the existing insurance mechanisms as well as to establish new ones, for example by upscaling the index-based schemes currently in pilot phases. Awareness creation, capacity-building, multi-actor collaboration, and technological innovations such as remote sensing, machine learning, crop modeling and yield predictions at different scales, or improved risk assessments and analytics have been identified as recommendations to further improve climate insurance in Sri Lanka.
Hybrid solutions such as a combination of indemnity- and index-based products or forecast-based financing could help to avoid delays in payout and prevent farmers from getting stuck in vicious cycles of loans or “poverty traps” after disasters or other shocks. Combining funding from the public and private sector as well as different value chain actors would be beneficial to share risk more widely and increase the resilience of Sri Lanka’s agriculture sector.
However, it is important to note that even an enhanced and upscaled insurance cover cannot fully protect farmers from climate-induced losses and damages. Insurance must be part of a comprehensive risk management and adaptation framework that combines technical and traditional knowledge, focuses on agroecology and climate-smart cultivation practices, incorporates agrometeorological advisory and early warning systems, and supports all supply chain actors to access a range of financial instruments and services to transfer and retain risks.
The information presented here is based on ongoing research conducted by SLYCAN Trust, a non-profit think tank based in Sri Lanka. It was gathered through key stakeholder interviews, expert consultations, group meetings, workshops, and a field survey of agricultural communities in two dry zone districts of Sri Lanka.