By Hanjo Fourie, Business Head: Agri Underwriting at Santam
The agriculture sector is integral to the South African economy, contributing around R400 billion to GDP each year, supporting approximately 870 000 jobs, and weighing in with USD13 billion in export revenue.
Additionally, it plays a critical role in supporting South Africa’s food security – a growing risk globally. But unfortunately, the sector is more prone to the systemic risk of climate change, and specifically water related losses, than any other sector.
The impact of climate change on farming is already evident, with unpredictable weather patterns such as drought, flooding, and hail causing substantial damage to both crops and infrastructure. The majority of these weather-related catastrophe claims on crops were for hail.
Although climate change risk is top-of-mind among global insurers and reinsurers, farmers have long battled the severe effects of weather patterns such as El Niño and La Niña. El Niño is a weather phenomenon that results in less rainfall and higher temperatures across much of Sub-Saharan Africa, while La Niña contributes to periods of above-average annual rainfall in the region. Some of the biggest drought years were 2007, 2012, 2016. This current season rains came very late; outside of the optimal planting windows in most areas, but luckily the season turned out well from a production point of view.
In addition to shifting climate factors, the current landscape means that farmers are already contending with higher input costs like diesel, fertilizer, and pesticides among others. This increases the cost of production for farmers which makes it even more important to mitigate production risks. To ensure there is a return on capital invested, and thereby the sustainability of the operation secured, the impact of production risks must be managed sufficiently.
Production risks, such as the ones listed above, can negatively impact a commercial farm’s profitability, its liquidity, and even the sustainability of its operations. But farming businesses cannot produce any return without taking on risk. Producers must evaluate the cost of risk transfer versus the impact of risk exposure on capital.
There are three key strategies that modern farmers typically evaluate during the decision-making process: reduce the probability of the occurrence of a possible contingency, transfer the risk utilising insurance, or mitigate the impact of production risks, if they do occur. Most producers make use of risk transfer, using crop insurance to hedge against production risks.
Crop insurance is an ideal instrument for farmers to mitigate production risks – including weather-related losses.
Furthermore, local farmers unfortunately face unique on-the-ground risks which exacerbate water-related losses, most notably those linked to deteriorating infrastructure and unreliable electricity and water supply. Agricultural insurance therefore plays a crucial role in helping farmers manage the financial risks associated with a loss event like drought, flood or hail which can have devastating effects on crop yields, livestock, and overall farm productivity.
With the combined effect of climate shifts and a decline in national and municipal infrastructure, agricultural insurance needs to offer more targeted, flexible product options.
Santam’s crop product protects against loss or damage due to hail, frost, locust, in transit and fire, while multi-peril crop insurance (MPCI) policies protect against loss or damage due to drought, excess rainfall and flood.
To understand the type of cover required for a particular farm, the impact of the risk on the producer’s income and ability to tolerate risk must be assessed. For MPCI cover we evaluate each client’s production history, soil analysis and location to provide tailored cover for farmers to meet their needs and to align with their risk mitigation strategies. The cost of the insurance will therefore be influenced by these factors.
While affordability of cover continues to be an important factor when buying insurance, it must be noted that the price of crop insurance is driven by, among other factors, historical loss experiences, type of crop and the location of the operation. The only way for an insurer to rein in costs would be to reduce cover through higher policy excesses or excluding cover for specific perils. But failing to match premium to risk has dire consequences. Farmers should carefully study their policy wordings to ensure they are getting the most comprehensive cover. Additionally, steps can be taken to reduce the financial and insurable risk exposures of farms by diversifying geographic exposures and income streams.
Relevant Agribook pages include “Risk management and insurance“
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