Jan-Hendrik Botha – Head of Underwriting at Western
Technological development, though rapidly accelerated by the COVID-19 pandemic, has been changing the insurance landscape for some time already. The agriculture sector is a prime example of an industry that has undergone a significant transformation, driven by the development of new tech-enabled machinery and data-driven management systems such as precision farming. Technological trends such as this, combined with the impact of inflationary forces is changing the face of the South African insurance industry and the prevailing risk landscape, both locally and abroad.
Nowhere have the effects of digitalisation been felt more acutely than in the agricultural sector, where technological innovation has propelled a large degree of change over the last decade. Artificial intelligence and automation are behind the emergence of precision farming – a method that employs several strategies and tools to optimise soil quality, and crop yields, and increase overall productivity. These paradigm-shifting technologies have given rise to countless opportunities but in doing so, has introduced new risks.
Technological trends behind the advancement of the agricultural industry
Process automation and new farming techniques that harness the power of data are effective means by which to increase efficiency. But smart equipment and systems require sizeable capital outlay and introduce new risks and exposures that must be mitigated by insurance products that are tailored to this evolving landscape.
Along with the en masse adoption of electric utility vehicles and the cost and risk implications thereof, today’s agricultural implements rely on a complex network of electrical components. For example, a diesel-fueled harvester operates by means of an intricate electronic system that includes GPS navigation, computer systems and cameras. According to one study, in one series of combined harvesters, the number of electronic controllers involved in the operation of the implement has increased fivefold within just 15 years.
The high value of the electronic and computer systems that power today’s harvesters has seen the cost of these kinds of implements increase dramatically over the last few years, with the sum total of these components reaching over R1 million. In South Africa, where lack of capital has served as a barrier to entry, adoption of these kinds of innovations has been relatively slow but is steadily increasing. These developments have led to the risk landscape in agriculture becoming more nuanced, to allow for specialist areas and types of risk.
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How this trend has influenced product development in the insurance industry
Previously, insurance for an agricultural vehicle required a straight-forward motor policy, but with the advent of electronically powered machinery, policies have been adapted to require cover for a mix of motor and electronic equipment to cover new risk exposures. This additional cover has resulted in higher insurance premiums.
Rating structures have remained fairly consistent, or even decreased, due to the competitive nature of the industry. While the advanced technology being introduced into essential implements has boosted capabilities, these components are more susceptible to risks like lightning strikes and fires. Exposures have therefore shifted from traditional driving accidents to the potential for electrical damage caused by harsh climatory forces, power surges and equipment failures. Furthermore, in the case of artificial intelligence, in particular, the loss of data poses a significant threat to the farmers’ bottom line.
These tech-driven trends have led insurers to structure policies to account for new, emerging risks under separate sections that apply exclusively to cover for electronic equipment and specific eventualities that might occur.
Drones are another prime example of how technology is being harnessed by the agriculture sector to improve efficiency, reduce the cost of labour and introduce more sustainable farming methods. Currently, drones can be flown without insurance, but must be operated in accordance with the South African Civil Aviation Authority’s legislation. High-performance drones can cost in excess of R350 000 and introduce a new level of risk that requires specialist cover.
Standard insurance products provide static coverage for drones (does not apply when in operation) and does not include liability coverage. Specialist products provide more extensive cover, which includes third-party liability and is subject to specific terms and conditions. Technological trends are playing a key role in revolutionising the insurance sector through the development of new insurance solutions.
Another emerging trend that is influenced by several macroeconomic factors, coupled with high inflation and its impact on supply and demand, is the increasing value of second-hand vehicles. The value of many of these vehicles, in some cases, exceeds their true retail value due to a shortage of cars as well as parts and components. It has now become commonplace for consumers to purchase used vehicles at a cost that exceeds their retail value. But this has a knock-on effect on what consumers expect from insurers and the potential implications for higher levels of underinsurance among South Africans is concerning.
Insurers are currently accommodating client requests to insure above retail value, up to agreed percentages, subject to the increased market value being confirmed at claim stage. Companies like TransUnion, for example, have already established tools such as their Vehicle Price Index. The VPI evaluates the link between new and used vehicle pricing increases from a basket of passenger vehicles that includes 15 of the most popular manufacturers. The index is created using vehicle sales data from throughout the industry, and if market pricing anomalies persist, this might become a worthwhile price index for insurers to consider.
Adaptability is one of the cornerstones of futureproof insurance companies, not only because of the indelible change that the risk landscape is undergoing but because of South Africa’s unique economic standing post-pandemic.