Hennie Van Staden, CEO at iMPAC. iMPAC is underwritten by Bryte Insurance Company Limited
The agriculture sector is among the most vital sectors in sustaining livelihoods and
contributing much-needed raw materials to many other critical industries/sectors.
It is a vital pillar of growth in any economy, and South Africa is no different. Further – and considerably more – strained by the impact of COVID-19.
However, for this sector – which employs more than 5% of South Africa’s workforce, contributes 4% of the national GDP and has a multiplier effect that is several times higher – the journey of sustainability is one that requires widespread support.
Agriculture is a risk-prone sector, with farmers encountering a range of market and production-related exposures. Generally speaking, market volatility due to a variety of factors, i.e. extreme weather conditions, insect infestations, crop diseases, and storage and transportation challenges are among the leading challenges negatively impacting yield potential and/or resulting in financial losses. Some may argue that large, commercial farming operations are more resilient however, the small to medium farmers have a much more diminished ability to recover from a serious event.
While many exercise agility and build in the impact of certain exposures – e.g. spreading risk by growing a mix of crops, using less water intensive farming techniques, planting crops that are more drought resistant and adopting staggered crop planting – the reality is that these cannot be eliminated. More so, traditional risk management is limited in its ability to manage, the highly systemic or unpredictable nature of catastrophic risks that simultaneously impact several farmers within a region (e.g. regional droughts or floods) let alone unforeseen risk such as the COVID-19 pandemic.
The result, widespread defaults on loans, unpaid bills, retrenchments and a scarcity of agriculture and other dependent commodities. Additionally, financial institutions and input suppliers lose too. Naturally, the entire value chain is disrupted and suffers losses.
Insurers as catalysts
In South Africa the high cost of traditional crop insurance products and the inherent short comings of traditional insurance products led to farmers building up huge financial debt over the last decade, resulting in limited or reduced access to input financing for farmers. Emerging farmers with little or no financial security faces even bigger challenges of which input financing being the most problematic.
Insurers working alongside farmers can support in developing more innovative risk mitigation strategies and solutions that directly address individual needs and exposures but cater to the same, shared challenges across the sector. Service providers catering to the sector must be innovative (but responsibly so), proactive and collaborative in developing offerings that are tailored to the specific business and region in which its services farmers.
Innovative and non-conventional products
Innovative products such as revenue-based offerings can assist farmers in reducing the costs of insurance and the costs of administering as well as delivering agricultural insurance. Revenue based product assists in removing many of the inherent short comings of traditional products that have plagued agricultural insurance in the recent past. Such non-traditional products can have a significant impact in the underwriting of emerging farmers and giving them access to input financing, by adding this simple yet sophisticated application of the product to protect their income
Traditional multi-peril product always excludes hail cover which necessitated the farmer to take out additional hail protection at an additional cost. Traditional multi- peril products covered the farmers on a yield base and therefore do not protect the farmers if there is collapse in the price of commodities, which necessitated the farmer to also hedge the pricing aspect through the exchange traded futures market. The traditional product also limited the maximum guaranteed percentage cover on a crop at 65% of insurable value, where revenue product can offer coverage up to 80% as every farmer financial risk appetite might be different year on year
The chain is only as strong as its weakest link
As diverse insurance covers become more accessible and are adopted by an increasing number of players in the agriculture sector, the more likely it is that the reinsurance market will actively support insurers on a broader spectrum of risks. In the interim, a continued, intensifying focus on understanding of the inherent risks and market forces that farmers face, is imperative.
Insurers are well placed to lead efforts that also emphasise greater collaboration across underwriters, crop brokers, banking institutions, the farming community and government to help strengthen every link of the value chain – especially in these extraordinary circumstances .
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Momentum Corporate is a part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider. Momentum Metropolitan Holdings Limited is a Level 1 B-BBEE insurer.