Designing a parametric flood and drought insurance framework for Caribbean farmers and agricultural SMEs: case studies of Belize and Saint Vincent and the Grenadines

The vulnerability of the Caribbean region’s agriculture sector to weather shocks is acute and is therefore in need of greater financial and fiscal safeguards. Considering this, this study proposes the development of an innovative, meso-level parametric weather-related insurance framework, leveraging blockchain technology, to protect smallholder farmers in Saint Vincent and the Grenadines, Belize and other participating Caribbean countries against the dual threats of excess rain (flooding) and deficit rain (drought). The proposed system is based on two distinct, policy-centred, easily calibrated parametric triggers. The excess rain-driven policy measures are activated by a dual trigger: (i) the occurrence of a hurricane affecting the country; and (ii) rainfall exceeding the upper limit of the 95% confidence interval. Conversely, the deficit rain-driven policy measures are triggered upon: (i) the official declaration of an El Niño or similar event; and (ii) rainfall falling below the lower limit of the same confidence interval. This architecture eliminates the need for individual damage and loss assessments, a key limitation of past indemnity-based schemes. Data analysis for Belize and Saint Vincent and the Grenadines confirms the financial viability of these triggers, with estimated payouts over a 20-year period demonstrating an explicit need for such coverage. To address the challenge of covariate risk, whereby a single event triggers claims from all policyholders simultaneously, the framework incorporates a robust risk transfer mechanism. The primary meso-level insurer (e.g. Caribbean Catastophe Risk Insurance (CCRIF)), which aggregates risk from thousands of farmers, can secure reinsurance, perhaps through the issuance of a catastrophe bond directly on the blockchain. This catastrophe bond, issued by a Special Purpose Vehicle (SPV), is programmed with the same parametric triggers as the primary insurance policies. Bondholder funds, held in a stablecoin-collateralised pool, are automatically transferred to the insurer the moment the oracle system verifies a triggering event. This integration creates a seamless, end-to-end risk transfer mechanism from the farmer to global capital markets. By bolstering rural livelihoods and promoting food security through quick post-disaster financial support, the suggested approach also helps Caribbean SIDS develop resilience. It places the strategy within larger frameworks for disaster risk financing and climate resilience. These interventions must be understood within the broader structural challenges facing Caribbean economies, including inequality, productivity gaps, and economic vulnerability. When strategically deployed, insurance can be leveraged to strengthen public policy delivery and support resilience in direct alignment with the 2030 Sustainable Development Agenda.