Rooted in resilience: crop insurance as a fiscal tool for climate adaptation and nature restoration in the EU agri-food system

The EU’s crop sector urgently needs to adapt to increasingly unpredictable environmental conditions. Like the wider agri-food system, the sector faces growing disruption from climate change and nature degradation, alongside a range of other drivers such as shifting geopolitical and transition risks. Given that the macroeconomic implications of this disruption are likely to rise in frequency and severity, it is more vital than ever to protect the system and thereby guarantee food security across Europe.

This report explores the climate- and nature-related drivers of risk to the EU’s agri-food system. The report focuses on the crop sector due to its high exposure to both drivers. In practice, insurance has not played a significant role in promoting adaptation in that system. Yet crop insurance is a promising tool for shifting fiscal risk off governments’ balance sheets.

Crop insurance could form part of a proactive, coordinated policy response to build a resilient food system. Inaction would come at a high cost, as damage to the crop sector from climate change and nature degradation would lead to losses that have macroeconomic effects ranging from food price volatility and supply chain disruption to broader financial system impacts.

Core findings

Integrating crop insurance and adaptation into fiscal planning is necessary for the long-term stability of the EU’s agri-food system and the sustainability of its public finances. Ministries of Finance could dampen the potential macroeconomic effects of agri-food shocks, maintain rural sustainability and avoid undue fiscal pressure from post-disaster expenditure by:

• Increasing public spending on adaptation to reduce overall risk to the agri-food system. A significant increase in public investment in adaptation for the crop sector would improve the resilience of the EU’s food system by reducing farm and supply chain vulnerability to hazards. This would mitigate both macroeconomic risks and threats to on-farm business continuity.
• Increasing the uptake of crop insurance to provide greater protection and encourage risk spreading across multiple economic actors. Crop yield variability is a longstanding issue in agricultural economics, and climate adaptation can only partially reduce the risk. Shifting this risk off Member States’ balance sheets could be an effective policy goal, as it would spread risk across diverse portfolios and geographical areas, reducing concentrated exposure to shocks.
• Shaping insurance underwriting practices to incentivise adaptation and further reduce potential macroeconomic risks. A central imperative for the EU is to move beyond a reactive, grant-based model to proactively shape crop insurance markets. This would incentivise adaptation in their underwriting practices and de-risk private investment in adaptation in EU agriculture. Price signals could incentivise farmers to adopt risk mitigation measures that reduce vulnerability to climate- and nature-related perils, in return for a lower insurance policy premium.