Drought exposure and crop insurance demand: evidence from Rural China

Extreme weather increasingly threatens agricultural production, underscoring the need to enhance farmers’ adaptive capacity and strengthen disaster risk management. Using panel data from China’s National Fixed Observation Points (NFOP) matched with ERA5 data for 2009–2019, this study employs fixed-effects models to examine the effects of extreme weather on farmers’ agricultural insurance participation and insurance expenditure, and further analyzes the moderating role of insurance claims. We further examine how variation in the severity of extreme weather affects farmers’ crop insurance participation and coverage levels. The results show that drought exposure increases farmers’ likelihood of purchasing agricultural insurance, particularly under prolonged drought conditions. However, the effect on insurance payment levels is mixed: short-term drought shocks are associated with increased insurance investment, while moderate-duration drought shows a negative association, and intermediate horizons yield insignificant results. This heterogeneity suggests that farmers‘ coverage adjustment responses are contingent on the duration and timing of drought exposure. The association between drought exposure and insurance uptake is more pronounced among households with prior claim experience.