By: Andries Weise, Manager for Market Intelligence and Marketing at Mutual & Federal
South Africa needs to cultivate a material mind-set when it comes to its agricultural demographic and this is highlighted even more as the country faces one of its worst droughts in two decades.
The drought is having a hugely negative effect on different sectors of the economy, impacting a number of areas including the insurance industry, food security, the health of the countries livestock as well as the financial impact on the agricultural sector.
The importance of the agricultural sector to the economy is clearly of enormous significance and drastic changes are required to address the sector’s challenges in the long-term.
South Africa needs a government sponsored insurer in the agricultural sphere similar to that of the South African Special Risks Insurance Association (SASRIA) model. SASRIA cover is designed to supplement insurance cover that insurers exclude on the basis of damage being caused by extraordinary circumstances for which they are not prepared to assume risk. Discussions around an
insurance model for disaster relief is in progress and in terms of the National Development Plan, the government has a clear interest in putting South Africa on a path to food security, amongst other things.
However, in comparison to the rest of the world, insurance in the agricultural industry is not well subsidised. Considering South Africa’s limited water resources and other factors such as the current combustible state of biomass due to the drought, this should be addressed. A material mind-shift and collaboration between different parties is required to support the ongoing viability of the agricultural sector, which has a large impact on the economy.
Of the 19 Agri insurers in SA at the moment there are only three that offer crop insurance and this is done in the conventional manner where you have basically two types of cover i.e. hail and multi peril. If we talk about drought/floods etc. (large scale natural disasters) the current situation is that a farmer would need multi peril insurance. This cover is quite comprehensive but predominantly aimed at the commercial farmer with the capacity and scale to justify the cover and pricing.
It is estimated that only some 30% of dry land South African crops are insured. There is a vicious circle in that the price is determined by the exposure and the premium income derived to cover potential losses. The exposure is quite substantial and the price relatively high which means that less farmers opt for the cover which means the participation is less which means the premiums have to be higher which means less participate and so forth. The results have also been less than optimal for the industry over the last few years and reinsurers and insurers alike are quite careful about the extent of their exposure.
Two things need to happen to make the cover accessible for the broader farming community from small scale and existence farmers to the larger commercial entities:
- The product needs to be simpler to administer and understand which will also make it cheaper to administer and some serious work has to be done in this regard. It also brings some far reaching investment in technology spread over the country to facilitate the information and administration.
- The premium pool needs to be increased to provide for the claims and also decrease the individual contributions.
Government intervention would be needed for both these points and will facilitate the implementation of such scheme by assisting with the information management infrastructure and also by subsidising the premiums of farmers making it viable and sustainable.
CREATING A POOL
The suggestion from the industry at this point is exactly that: a pool created and funded by a combination of insurers and the government. This pool ownership rests between insurers and government.
If this happens, the current insurers would form part of the scheme and it will actually increase participation as the companies not currently participating in the crop environment could get some “skin in the game”, not just comment on it and expand the distribution of such cover to farmers over the country.
The relative simplicity of the product would also mean that intermediaries currently not interested in providing the cover to clients would be more willing to do so, much as we saw in the evolution of SASRIA cover in the country. Insurers currently involved in the crop industry would probably continue to do so offering more specialised and specific cover to individual farmers. One has to remember that a “national scheme” by it’s very nature cannot be everything for everybody and is essentially a first defence against catastrophic losses and the maintenance of farmers livelihood and food security for the country and region.
In the USA participation in the scheme in 2014 was at a level of some 90% of planted hectares because of the difference the 1994 and 200 acts have had on government participation and subsidising of premiums. Perhaps a better example because of the large number of small scale farmers involved would be that of China where Central Government contributes 40% of the premium, Provinces some 25%, local authorities(countries) 13% and farmers 20% with the balance carried by other role players. Both these schemes have had their hiccups but we believe the learning has largely been done and we can, as an industry, contribute to the wellbeing of the sector by pooling our expertise, administrative abilities and capacity and government resources to the benefit of all.
There are some fledgling examples in Africa where this type of product has proven to have some success, notably Kenya. The proposed structure still has some challenges, but these can be dealt with and the next step is a workshop with the World Bank on index insurance and financial models to assist small farmers. We need to look at our own legislation historically and also current challenges, competition issues and a legal structure to create the pool.
Work needs to be done, but the insurance industry is keen on providing a solution in partnership with the government to manage and mitigate the risks involved in farming in South Africa.