China’s agricultural sector has been experiencing rapid growth in recent years, but the income distribution gap among farmers has become increasingly noticeable. To address this issue, agricultural insurance has emerged as a critical security system for agricultural production. It can provide protection against natural disasters, guaranteeing timely insurance compensation for farmers in such instances. However, the impact of agricultural risk on farmers’ income inequality and the role of insurance in alleviating this inequality deserve more scholarly attention. While existing literature focuses mainly on the urban-rural income gap, research on income distribution among farmers is comparatively lacking. Against this background, this paper aims to theoretically and practically explore this under-examined aspect.

Our study is founded on the Kesten distribution model, which establishes a theoretical income model for rural households and incorporates risk and insurance multipliers. To examine the impact of disaster losses, insurance coverage, subsidies and insurance market structure on rural income distribution, we conduct numerical simulations and evaluate the Lorenz curve and Gini coefficient. The empirical research uses provincial panel data from 2011 to 2020 and applies various models (single equation model, simultaneous equation model, panel threshold model, and panel quantile model) to test our hypotheses and ensure the robustness and effectiveness of our results.

The conclusions of this paper are as follows: (1) The increase of risk loss probability and loss degree will increase the Gini coefficient, and the increase of agricultural insurance subsidies will reduce the Gini coefficient. (2) The relationship between the degree of agricultural insurance coverage and the Gini coefficient depends on the net effect of insurance coverage on farmers’ income changes. When the net effect of insurance coverage reduces income changes, it will promote income equality. When the net effect of the degree of security increases income changes, it will aggravate income inequality. (3) The lower the initial difference between individual farmers, the more agricultural insurance is conducive to promoting income equality.

The contributions of this paper are as follows: (1) At the theoretical level, the general model of Sargent and Stachurski (2021) on income is set as a model that can be used to study the impact of agricultural risk and agricultural insurance on rural household income in China, which provides a reference for similar research in the future. (2) At the empirical level, it enriches the research on the relationship between agricultural insurance and the income gap of rural residents, and comprehensively discusses the important impact of agricultural insurance on improving the income gap of rural residents. (3) At the practical level, the conclusions can be used to guide the poverty alleviation of agricultural insurance, improve the distribution work, and help agricultural insurance to better play the role of insurance protection and financial service entities.