Climate shocks are becoming more and more common, and financial services can help households build resilience to them.

Those who survive face immediate financial demands. A family’s field may be buried under silt, with its harvest lost or livestock gone. Work stops, and households draw down savings to cover daily expenses. Households with insurance coverage or a large network recover part of the loss through a payout or informal risk sharing, leaving something for what comes next. Those without these options might borrow to rebuild and buy inputs for the next season. 

A new synthesis: Adapting financial tools to how climate risk works

IPA's new synthesis, Strengthening Climate Resilience Through Financial Inclusion, summarizes rigorous evidence on how basic financial services — savings, credit, digital payments, and insurance — protect households against climate shocks. The evidence suggests that many of the financial tools needed to strengthen climate resilience already exist. The biggest wins come from adapting them to how climate risk materialises, as well as to the realities of consumers and households using them and the providers serving them. Financial service providers, policy makers and researchers should focus on matching products to the actual challenges households face, adapting how products are designed and delivered, and combining financial services with complementary products and technologies. 

Key findings

Matching financial products to household risks matters, but getting the match right isn’t easy

Insurance is useful if it pays when people need it. With rainfall index insurance, rainfall at a district’s gauge may mean no payout at all, even when a sudden downpour destroys a household’s crop elsewhere in the same district. This mismatch, known as basis risk, can be tackled directly by redesigning the product to shrink the gap, for example by using more localized indices or indices with multiple triggers, though these approaches can be costly. The other is to accept that basis risk exists, and help people understand it better through experiential games or training. Results on the latter have been mixed, sometimes backfiring by leaving people better informed but less willing to pay. 

But even well-designed insurance may not cover the risks people worry about the most. Lower uptake of insurance among women may partly reflect this. Agricultural insurance covers yield risk, but women often carry additional risk from health shocks linked to fertility and childcare that the product does not cover. More liquid instruments, such as savings, may be better aligned with those risks, even if they offer less protection than insurance against agricultural losses.

Adapting how products are designed and delivered changes who they reach and who bears the risk. 

Financial services can be hardest to provide when people need them most. After a major flood, a bank may hesitate to lend at all, not because any one borrower is a poor credit risk, but because lenders expect repayment to fall across an entire flooded district. Pre-shock screening using existing customer information can support profitable emergency lending, and bundling with insurance can reduce lenders’ exposure to climate risk and increase loan approvals. But shifting the repayment risk onto providers has costs of its own. In Ethiopia, delayed-premium insurance products reached more liquidity-constrained customers, but more than 15 percent  of policies subsequently defaulted. 

Delivery matters as much as design. Having financial resources matters less if a household can’t reach them quickly and cheaply. Delivering relief through mobile money rather than cash increased household diet diversity by 9–16 percent and increased how often children ate, while access to mobile money in Mozambique helped households smooth consumption during floods, partly by making it easier to receive help from family elsewhere. Beyond payments, access to small digital loans in Kenya made households 6 percentage points less likely to forgo spending after a shock, and promoting mobile savings increased precautionary savings and reduced reliance on costly coping strategies among vulnerable women.

Bundling financial products with resilience-enhancing technologies can provide more comprehensive protection against climate risk.

Different tools can protect households against different dimensions of risk. In Mozambique and Tanzania, combining drought-tolerant seeds with index insurance protected farmers against different levels of drought risk: seeds mitigated moderate drought losses, while insurance helped offset severe losses that seeds could not address. Farmers who experienced shocks with these technologies subsequently increased agricultural investment beyond pre-shock levels—a “resilience dividend.” In Ghana, bundling credit with index insurance increased fertilizer adoption among smallholder farmers, and in Ethiopia, bundling insurance with credit and input vouchers increased agricultural investment and productivity.

Priorities for future research

Early evidence is promising, but the gaps remain large. Most studies focus on agricultural households, leaving open questions about whether these findings extend to urban populations, informal workers, and people outside farming. Moreover, where evidence exists, it is often based on isolated income and health shocks rather than climate shocks, which can hit entire communities and recur over time. 

Five priority research questions stand out. 

• On matching products to challenges: Which financial instruments work best for different types and severities of climate shocks? 
• On commercial viability: Under what circumstances and product models can financial services for climate shocks be both commercially sustainable for providers and welfare-enhancing for consumers?
• On adaptation trade-offs: Do financial products that ease the cost of a shock reduce households’ incentive to make deeper adaptive changes, such as shifting away from climate-exposed livelihoods?
• On digital infrastructure: How can digital systems stay functional during large, widespread shocks?
• On consumer protection: What consumer protections are needed as financial products, increasingly bundled or digital, become harder for consumers to understand and navigate?

IPA is already testing what comes next

IPA is currently building the evidence to address some of these questions and to build our understanding of how financial services can support household resilience to climate shocks. In Bolivia, IPA is piloting a government program pairing early warning systems with index insurance. In the Philippines, IPA has just completed evaluating a credit product for climate-resilient construction and is developing research on climate and health microinsurance for small firms. The studies set in the Philippines sit outside farming, where little evidence exists.

Realizing the full potential of inclusive finance for climate resilience will require better-targeted product design and more deliberate research to close these gaps. Funders, financial service providers and researchers interested in supporting or joining this work can contact financialinclusion@poverty-action.org for more information.