Paleoclimate histories improve access and sustainability in index insurance programs

Abstract

Proxy-based climate reconstructions can extend instrumental records by hundreds of years, providing a wealth of climate information at high temporal resolution. To date, however, their usefulness for informing climate risk and variability in policy and social applications has been understudied. Here, we apply tree-ring based reconstructions of drought for the last 700 years in a climate index insurance framework to show that additional information from long climate reconstructions significantly improves our understanding of the underlying climate distributions and variability. We further show that this added information can be used to better characterize risk to insurance providers, in many cases providing meaningful reductions in long-term contract costs to farmers in stand-alone policies. The impact of uncertainty on insurance premiums can also be reduced when insurers diversify portfolios, and the availability of long-term climate information from tree rings across a broad geographic range provides an opportunity to characterize spatial correlation in climate risk across geographic regions. Our results are robust to the range of climate variability experienced over the last 400 years and in model simulations of the twenty-first century, even within the context of changing baselines due to low frequency variability and secular climate trends. These results demonstrate the utility of longer-term climate histories in index insurance applications. Furthermore, they make the case from a climate-variability perspective for the continued importance of such approaches to improving the instrumental climate record, even into a non-stationary climate future.