By Daniel Stevens, Head of Agriculture-Crop Insurance at Santam
With biodiversity and economic issues taking centre stage in South African agriculture, we believe that index insurance offers a unique solution to farmers.
With approximately 1.3 million smallholder farmers and 40 000 commercial farmers, both are exposed to the same risks. However, the challenges faced by the former are unique due to a number of factors. These challenges present an opportunity for insurance products that fit the nature of these farmers.
What is index insurance?
An index is defined as a measured value of a parameter such as rainfall, temperature, soil moisture etc. It pays out if a particular measure, for example, rainfall is above or below a certain level. With index insurance if the measure drops below, or is above, a predetermined level the policy will pay out to the farmer or the insured. Therefore, there is no waiting period for an assessor to assess the damage. This is because it takes the actual measured variable such as rainfall throughout the insurance cover period into consideration and compares it to the historical average for the same grid and period to determine the deviation from the historical average.
This product is currently available in other African countries such as Kenya, Mali, Uganda, and Zambia and is dependent on government support and subsidies. In countries such as the USA, India, and China, multiperil agricultural insurance is subsidized in order to promote food production and sustainability.
Although not readily available in South Africa just yet, Santam has identified it as a viable solution to provide much-needed cover for farmers, especially small and medium farmers. Santam has completed a pilot on a Soil Moisture Index product in collaboration with the South African Insurance Association, The Department of Agriculture, Land Reform and Rural Development, the Financial Services Conduct Authority, and the Prudential Authority and a decision is pending on whether it will be permitted or not.
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What Types of indexes are available for farmers?
Weather Based Index Insurance is concerned with a predefined critical weather event such as soil moisture, rainfall, temperature etc. The structuring of this index is based on a weather parameter. The payout triggers when the insured parameter hits the agreed threshold. For example, if the soil moisture content needed for optimal plant growth should be 40% but the available moisture for the plant is below or above that – leaving room for soil moisture deficit of excess soil moisture content, given the agreed threshold between the insured and the insurer, a payout may be triggered.
Area yield index insurance considers the reference yield per crop per region. The yield guarantee level is based on reference yield which can be an average yield in a region – and therefore a payout triggers when the actual yield falls below the guaranteed yield, which is benchmarked against the average area/regional yield, hence the term Area Yield Index.
Normalized Difference Vegetation Index (NDVI) is a product that is used to quantify vegetation greenness and is useful in understanding vegetation density and assessing changes in plant health which affect plant quality. A payout triggers when the measured parameter falls below the agreed threshold.
Which index products are available in South Africa? While the country awaits the index insurance products to be legislated in the insurance act, the implementation of these products will see job creation in South Africa reaching higher levels thus greatly impacting the long-term economic performance of farms and the country. Should this product be permitted in South Africa, and purchased by farmers, there would be a great impact on the long-term economic performance of farms. This is because insurance has a stabilizing effect on income through indemnity payments on insured losses. A stable income often is a condition to receive financial loans and to be able to invest. Farm investments are necessary for farm growth. In addition, some production activities are too risky without insurance or on-farm risk reduction measures are not possible or not efficient. When having insurance, farmers are able to readjust their production strategies and thus improve the economic performance when measures of risk avoidance or risk reduction are less efficient.
