Hanjo Fourie | Business Head | Agri Underwriting | Santam | mail me |
The agriculture sector is integral to the South African economy. It contributes around R400 billion to GDP each year. Additionally, it supports approximately 870,000 jobs across the country.
The sector also generates USD13 billion in export revenue annually. Moreover, it plays a critical role in supporting South Africa’s food security. Food security is becoming a growing risk globally. Unfortunately, the sector is more prone to systemic climate change risks than any other sector. Specifically, it faces significant water-related losses.
Water impact and climate change
The water impact on farming is already evident today. Unpredictable weather patterns cause substantial damage to crops and infrastructure.
For example, drought, flooding and hail events frequently impact farms. The majority of weather-related catastrophe claims on crops result from hail damage. Although global insurers and reinsurers prioritise climate change risk, farmers have battled severe weather effects for years.
For instance, farmers face recurring weather patterns such as El Niño and La Niña. El Niño results in less rainfall and higher temperatures across much of Sub-Saharan Africa. In contrast, La Niña contributes to periods of above-average annual rainfall in the region.
Some of the biggest drought years were 2007, 2012 and 2016. This current season, rains arrived very late in most areas. They fell outside of the optimal planting windows. Luckily, the season still turned out well from a production perspective.
In addition to shifting climate factors, farmers contend with higher input costs. These include increased prices for diesel, fertiliser, and pesticides, among others. This rise in costs increases production expenses for farmers. Therefore, it becomes even more important to mitigate production risks.
Water impact on farming and crop insurance
To ensure a return on capital invested, production risks must be managed effectively. This ensures the sustainability of farming operations.
Production risks negatively impact a commercial farm’s profitability. They also affect liquidity and the sustainability of farming operations. Production risks also include water impact on farming. However, farming businesses cannot produce returns without taking on risk. Producers must evaluate the cost of risk transfer versus risk exposure impacts on capital.
There are three key strategies that modern farmers typically consider:
- They work to reduce the probability of potential contingencies occurring.
- They transfer risk by utilising insurance products.
- They mitigate the impact of production risks if they do occur.
Most producers use risk transfer by purchasing crop insurance. They use this insurance to hedge against production risks. Crop insurance is an ideal tool for farmers to mitigate production risks. This includes protection against weather-related losses. Furthermore, local farmers face unique on-the-ground risks. These risks exacerbate water-related losses.
Water-related agricultural risks
Most notably, deteriorating infrastructure and unreliable electricity and water supply create additional challenges. Agricultural insurance plays a crucial role in managing financial risks for farmers. It helps mitigate losses from drought, flood, or hail. Such events can have devastating effects on crop yields and livestock. They also impact overall farm productivity.
With combined climate shifts and declining infrastructure, agricultural insurance must evolve. It needs to offer more targeted and flexible product options.
For example, our crop product provides protection against hail, frost, locusts, in-transit loss and fire. Meanwhile, multi-peril crop insurance (MPCI) policies protect against drought, excess rainfall, and flood damage.
To understand the required type of cover, several factors must be assessed. These include the impact of risk on a producer’s income. Additionally, the farmer’s ability to tolerate risk is evaluated.
For MPCI cover, we assess each client’s production history. We also consider soil analysis and farm location. This enables us to provide tailored cover that meets farmers’ needs. It also aligns with their risk mitigation strategies. The cost of insurance is influenced by these factors.
In conclusion
While affordability remains an important factor when buying insurance, other considerations, such as the water impact on farming, exist. For example, the price of crop insurance depends on historical loss experience. It also depends on the type of crop and the operation’s location.
The only way insurers can rein in costs is by adjusting coverage. This may involve higher policy excesses or excluding cover for specific perils. However, failing to match premiums to risk can have dire consequences.
Farmers must carefully study policy wordings to ensure comprehensive cover. Additionally, farmers can take steps to reduce their financial and insurable risk exposures. For instance, they can diversify geographic exposures and income streams.
