Parametric Insurance in Arid Regions: International Experience and Prospects for Implementation in Uzbekistan

Abstract

Climate change, increasing drought frequency and duration, water scarcity and high dependence of agricultural production on irrigation are fundamentally transforming agricultural risk profiles in arid and semi-arid economies. Traditional indemnity-based agricultural insurance, which requires individual loss assessment, is associated with high transaction costs, delayed claims settlement and limited accessibility for smallholder farmers. Parametric insurance provides an alternative by linking payouts to objectively measurable indices such as precipitation, temperature, soil moisture, vegetation health, river runoff or combinations thereof rather than to individually assessed losses. This study aims to systematize international experience in parametric and index-based insurance for climate risks and assess the prospects for adapting such instruments to Uzbekistan. The methodology combines a structured literature review, comparative institutional analysis of international insurance schemes, analysis of Uzbekistan's emerging agricultural insurance framework, and conceptual modelling of a drought insurance product suitable for irrigated and rain-fed agricultural systems. The findings indicate that a hybrid index combining meteorological, hydrological and satellite-derived indicators is potentially more appropriate for Uzbekistan than a simple rainfall index. The proposed model should account for precipitation deficits, dry-spell duration, temperature stress, vegetation conditions and irrigation-water availability while incorporating crop-specific phenological stages. A three-level architecture is proposed: micro-level insurance for individual producers, portfolio-level coverage for agricultural clusters and producer organizations, and sovereign or quasi-sovereign coverage against catastrophic drought events. The study demonstrates that parametric insurance should not be regarded as a substitute for climate adaptation. Its effectiveness is enhanced when combined with water-saving technologies, agricultural advisory systems, digital financial infrastructure, agricultural lending and reinsurance. Uzbekistan's recently established agricultural insurance framework creates a significant institutional opportunity for introducing parametric mechanisms as part of a broader climate-risk financing strategy.