History of the sector and current challenges
Unlike all other countries’ agricultural sectors on the continent, South Africa’s is characterised by a dual agricultural sector – consisting of a commercial well-established sector, with efficient infrastructure, technology, innovation, credit and insurance solutions, and a less developed, resource-poor emerging sector. Agricultural insurance, as traditionally practised in South Africa, adequately serves the former, but even so, its sustainability is at risk. This is because, in the last decade, there has been an increasing number of players offering both Hail and Multi-peril Crop Insurance (MPCI). Competition to retain and/or grow market share has resulted in dramatic reductions in premium rates – this has played out in favour of the farmer, and in a general deterioration of terms and conditions, thereby threatening the sustainability of the sector.
The national crop insurance industry is impacted by the extreme volatility of the frequency and severity of weather events – arguably linked to global climate change. These weather events almost annually result in large losses for the industry, such as those suffered due to drought in the 2006/2007 crop season, and extreme rainfall and flooding during the 2009/2010 and 2010/2011 seasons. For a market valued at approximately R1billion of premium, insurers and reinsurers carry huge losses during catastrophic years. In extreme event years, MPCI losses exceed 400% loss ratios, and Hail losses often exceed 150% loss ratios.
Large catastrophes are causing financial distress to the sector, to either insurers and reinsurers, or producers – particularly emerging farmers with low asset bases.
Need for insurance in South Africa
Insurance products are critical to the sector’s sustained success for numerous reasons, most notably:
· it is a vehicle for assisting emerging farmers, who are entering the sector, access credit products that are secured with crop insurance policies; and
· Providing producers with risk transfer mechanisms to absorb losses during catastrophic years.
These are important considerations since the commercial agricultural sector is shrinking owing to:
· An ageing producer base which is not succeeded by younger producers;
· Competitiveness is challenged by international competition, high costs of production and increased yield risk due to climatic events (cost of insurance is one such factor of production affecting our competitiveness);
· Consolidation of farms is occurring to achieve economies of scale to remain competitive; and
· Changing land-use patterns as arable land is used for inter alia game ranching, residential development and mining amongst others.
For these reasons, it is imperative that crop insurance is both affordable and the industry sustainable. This calls for drastic change and rapid innovation in the industry – initially through remediation of the status quo with currently available insurance products, and in the medium-term through innovation and change in the regulatory and business environment.
The way forward
As with any insurance discipline, for the sustainability of the industry to be guaranteed, the product offerings must be beneficial to farmers and, of course, risk adequate terms and conditions should prevail.
Munich Re is a proponent for seeking a systematic solution with existing insurance products, especially when it comes to MPCI covers. This solution entails a public-private-partnership (PPP) which ensures that natural catastrophe cover is funded through PPP initiatives. This solution becomes affordable for producers, profitable for insurers, and ensures a sustainable stable agricultural insurance sector by creation of a wider base. Munich Re has applied the elements of sustainable crop insurance systems in various economies – most notably in the US, Brazil, Turkey, Spain and Sudan, where crop insurance is co-financed by the government.
Insurers and reinsurers are currently in dialogue with the Government through the SAIA Crop Forum to develop a regulatory environment for a Public-Private Partnership against natural catastrophes, helping farmers to survive in case of possible consecutive years of extreme weather events.
Images emerging from the Horn of Africa (Somalia, Ethiopia and Kenya) where the agricultural production sector is under severe stress as a result of consecutive years of severe drought are frightening. The extent of the catastrophe is beyond the capacity of any private insurer. Only governments, with the support of International organizations, can assist farmers to recover from failed agricultural production.
It is for these reasons that South Africa – which is in one of the regions most threatened by climate change – must not wait any longer to join this group of countries and offering this innovative solution through a Public Private Partnership approach in order to sustain agricultural productivity and food security.