Coping With Extreme Weather Risks: Implications of Insurance Innovation and Government Subsidies in Agricultural Supply Chains

Extreme weather events increasingly disrupt agricultural supply chains (ASCs). Insurance serves as a vital financial buffer, compensating smallholder farmers' input costs while also enhancing their ability to repay loans. Traditional insurance, due to lengthy verification and delayed payouts, limits the farmers' quick response to extreme weather. Recently, smart insurance has emerged as a promising solution, leveraging index-based verification and automated payouts to facilitate timely farmer recovery. This study explores the operation of an e-commerce-based ASC under extreme weather, considering dual protection of crop insurance (traditional or smart) and government subsidies (premium or input). We examine the insurer's decision to adopt smart insurance and its alignment with the socially optimal outcome. Our results show that when farmer recovery efficiency is low, smart insurance is preferred only if traditional verification incurs high costs. Conversely, with efficient farmer recovery, the insurer always adopts smart insurance, which empowers the ASC to sustain under severe weather conditions but may lead to a decline in social welfare due to the associated subsidy expenditure. Furthermore, we analyze the implications of insurance innovation for government subsidy policies. We find that smart insurance can resolve the policy dilemma faced by traditional insurance, where no policy can outperform the other in both farmer well-being and social welfare under severe weather conditions. In contrast, smart insurance enables the input subsidy to achieve a dual-benefit outcome. This finding highlights the potential of insurance innovation in improving government policy effectiveness.