By Thokozile Mahlangu, CEO of the IISA
While it is a fact that businesses always face the risk of disasters that might result in unrecoverable losses, the reality is even worse for agricultural businesses, with farming being one of the riskiest activities to engage in.
Along with the typical business, financial, and market risks that affect other industry sectors, farmers are also exposed to risks related to nature, climate and weather events such as floods, hail, cold and drought. Unfortunately, the situation is becoming increasingly worse as a result of climate change.
Research by the United Nations Office for International Disaster Risk Reduction (UNIDRR) reveals that when looking at agriculture, industry, commerce, and tourism combined, the agricultural sector bears about 63% of damage and loss from disasters.
Yet, small and medium farmers in South Africa remain hugely underinsured, even though they face risks beyond their control that could wipe out their livestock, crops, and infrastructure. This is despite the fact that more underwriters have started to sharpen their focus on agricultural insurance, particularly for smaller and emerging farmers.
However, some industry bodies argue that the prevalent attitude among many farmers seems to be that agricultural insurance is an investment in a service that they are unlikely to ever need and so they would rather save the money or invest it elsewhere. This is perhaps not surprising, considering the tough economic climate that is forcing many farmers to tighten their budgets and do more with less.
But this is forcing many farmers to become risk-takers who choose to rather invest their money and hope that nothing goes wrong. Unfortunately, this is a recipe for disaster as a catastrophic event can occur at any time, potentially putting the farmer out of business.
Well-established agricultural enterprise VKB Group has previously weighed in on this issue, claiming that smaller farmers are often opposed to insurance because many of the crop insurance products are simply not available to them, but only to larger farmers. Despite this perception, there a number of products in the market that are aimed at smaller farmers.
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VKB has also found that there seems to be a lot of confusion among small farmers about how insurance premiums work, with many believing that since they are insured, they are guaranteed a high payout in the event of instituting an insurance claim. Yet, this is not always the case as there are rules and policy conditions that need to be adhered to, and this can lead to disappointment and distrust of insurance products among farmers.
However, considering the risks and their potential impact on a farmer’s livelihood, small and medium farmers should start viewing agricultural insurance as a crucial component of their business.
This naturally presents a significant opportunity for brokers and underwriters who have the potential to make inroads into this underserviced sector and in so doing provide a vital safety net for the country’s food security, as well as for the thousands of jobs that small scale farming provides for South Africans.
But to successfully change the mindset of small farmers about agricultural insurance will require skilled brokers who can provide context and act as experts who can guide and advise farmers about the risks they face and the insurance products and services that will best meet their needs. Similarly, underwriters must ensure that their products are tailored to the needs, challenges and risks faced by small and medium farmers in order to meaningfully establish themselves in this market.
Like in other economic sectors, agricultural insurance requires farmer-specific assessment. Brokers and underwriters alike must be aware that the demand for insurance will differ significantly from season to season, the type of crop, weather conditions and the farmer’s financial position.
While it is difficult to predict what the ultimate uptake of agricultural insurance among small and medium farmers will be, it can well be argued that more could be done in terms of developing insurance products for farmers, but this calls for closer collaboration between various stakeholders along the value chain.