Farming is a high-risk industry: hail, drought, floods and disease outbreaks are real and constant threats. Insurance has long been available to protect farmers against these, but lately, instead of relying solely on traditional insurance products, farmers have begun showing interest in alternative approaches to managing production risks.
According to the Garrun Group, a short-term insurer, escalating financial pressures such as fuel, electricity and fertiliser price hikes have motivated farmers to find other ways to reduce costs and manage their risks. In the past few years, the group has noticed a decline in the number of farmers who take out crop insurance.
Louis Naudé, of Naudé Garrun Brokers in Tzaneen, says the main reason for this is that the cost of insurance is increasing, particularly for crops. “Producers are taking different approaches to deal with risk and some aren’t even related to insurance.”
One strategy is the consolidation of farming businesses to achieve economies of scale.“Farms are getting bigger, and smaller farming businesses are disappearing,” he says.Some producers own several farms as a way of spreading risk. If one farm suffers crop failure, the others can still generate revenue.
Schalk Schultz, manager of business development: crops at Santam Agriculture, explains that it is difficult to forecast definitive trends in the agricultural insurance market, as insurance uptake often reflects the economic realities that farmers face.
“The demand for insurance differs significantly from season to season, the type of crop, weather conditions and the farmer’s financial position,” he says.
Opting out of insurance
Farmers are not unaware of the risks they face, but even with this knowledge, affordability informs their insurance decisions. There is a growing trend for farmers to be under-insured or not insured at all, particularly in crop and livestock farming.
The Garrun Group has found that farmers tend to reduce monthly business costs by cutting their spend on insurance. This provides short-term relief, but in the long term the farming operation could suffer severe losses.
Farmers also expose themselves to under-insurance because they tend to underestimate the replacement value of farming equipment and do not review their policies regularly. It is estimated that as many as 70% of South African farmers may be under-insured.
According to Schultz, only half of all crops in South Africa are insured. “Farmers understand that they need insurance and are willing to take out cover for items that help them generate an income such as vehicles or machinery. But [they] seem willing to gamble on their crop,” he says.
They do so as they believe their balance sheets are strong enough to cover potential losses. They might also have other ways to mitigate risk.“The question should not be, ‘Will I survive after the loss?’ but ‘Does it make sense to take the chance in the first place and lose the money?’” says Schultz.
Recently, strategies such as self-insurance have become more popular, according to Dawie Maree, agricultural economist at First National Bank. As the demand for traditional insurance has declined, there has been a greater uptake of savings and investment products that allow farmers to build up their own emergency funds. But contributing to a self-insurance fund requires great discipline, he stresses.
Schultz, too, is aware of the growing interest in self-insurance. Some farmers have the financial means to carry more risk, he notes, but warns that discontinuing traditional insurance policies could be dangerous.
“It will take many years to save enough money, and keep in mind that such savings are subject to tax,” he says.
A play-safe, combined approach
Self-insurance without the backup of traditional insurance is highly risky, says John Stebbing, director of general liability at specialised liability management company Camargue.
“If you experience losses in the first month of your investment or savings plan, you might not have enough money to cover the loss,” he points out.Schultz adds that although the sector’s interest in agricultural insurance is declining, there will always be a place for traditional cover. Individual farmers who wish to carry more of their own risk should consider taking out conventional insurance, and, at the same time, start a self-insurance savings or investment portfolio.
“This would be a more complex financial structure and farmers must discuss this with their financial advisors,” he says.
Farmers could also reduce the cost of their insurance and change the structure of their policies, adds Schultz. This would make it possible to still have cover for unforeseen events.
“Producers could take insurance for a limited number of perils instead of comprehensive insurance,” he says.
They could also request a higher excess to reduce premiums. This is where a self-insurance product could be useful. “With a higher excess, the farmer can carry more of the risk and use a self-insurance tool to fund possible shortfalls.”
Maree is of the opinion that more could be done in developing products for farmers.
However, this would require improved collaboration between agricultural insurance providers and financial institutions.
“There are limits to the kind of products we can develop in light of the National Credit Act, but we should learn from the products available to consumers and see how we can apply this to the agriculture sector.”
How did the drought affect agricultural insurance?
Agricultural insurance got a bad reputation during the drought as many farmers could not access drought insurance. According to Dawie Maree of FNB, reinsurers limited the number of new policies that several local insurers could take on in high-risk areas.
“The limit imposed by reinsurers is something the industry must be aware of. In future, similar limitations could be put in place again. This decision is made outside the country where reinsurers are based,” he explains.
Schalk Schultz says the drought had a “devastating impact” on the sector and warned farmers that droughts would occur again. “Farmers have to be prepared for drought, whatever insurance instrument they prefer to take up or move away from.”
Schultz says he hopes that the South African government will play a greater role in subsidising agricultural insurance in the country.
“One positive that came out of the drought is that there is a realisation that this [subsidised insurance] is something that South Africa also has to move towards. The industry is in discussion with government and they are taking this seriously.”
Phone Schalk Schultz of Santam on 012 369 1129. Phone Dawie Maree of FNB on 087 328 0401.