Agri... an industry solution towards losses made

07 March 2019 Myra Knoesen
Nico Esterhuizen, General Manager of Insurance Risks at SAIA

Nico Esterhuizen, General Manager of Insurance Risks at SAIA

More than 10 years ago, local insurers approached the South African Insurance Association (SAIA) to find an industry solution towards losses made on commercial agricultural businesses. Specifically in the domain of drought.

With SAIA’s commitment to develop insurance solutions that are sustainable, affordable and valuable to commercial and later also emerging farmers, SAIA started its Agriculture Insurance project.

FAnews spoke to Nico Esterhuizen, General Manager of Insurance Risks at SAIA, about the project and the proposals brought forward to National Treasury (NT).

A need for premium subsidy support

“Typically, in most countries where commercial agriculture is sophisticated, the government of that country will provide (premium) subsidy support to farmers. This means that the farmer will receive some money, indirectly or directly, from government to pay insurance premiums, because, from a weather perspective, it is often regarded as a loss-making business,” said Esterhuizen.

However, Esterhuizen pointed out that in South Africa there is no programme like this. He said in 2016, NT emphasised the importance of obtaining data from SAIA members, to support their request for support, and that NT appointed the World Bank to do some research for them on the need for insurance in the farming industry.

“The World Bank concluded that there is a need for premium subsidy support for commercial farmers. However, it is not necessarily premium subsidy support, it could also be in the form of paying reinsurance portions of the insurance cover. The World Bank also found that there was a need for some sort of insurance solution for emerging farmers and they proposed Index Insurance,” he stated.

A financial buffer against losses 

The product that insurers offer to the market, which poses specific challenges, is referred to as Multi-Peril Crop Insurance (MPCI). 

“The majority of agriculture in Sub-Sahara Africa remains highly susceptible to extreme, uncontrollable weather events that can severely impact both quality and yield of a crop. Such events in a South African context include insufficient rainfall and extreme temperatures. The effects of weather risk are felt most acutely by vulnerable agricultural households including developing farmers and also by most commercial farming ventures,” said Esterhuizen. 

“It is clear that farmers, especially emerging farmers who remain vulnerable to changing weather patterns, need a financial buffer against losses from drought, storms and floods. To help these small holder farmers to grow sustainably, innovative insurance products such as Index-Based Insurance could protect them from catastrophic weather losses. Index-Based Insurance can alleviate cost pressures and provide solutions to emerging farmers,” continued Esterhuizen.

Proposals to National Treasury 

In 2016, after the research, SAIA submitted an extensive proposal to NT for premium subsidy and reinsurance support for commercial farmers, as well as a proposal on how the industry can provide Index Insurance to emerging farmers. This was to address two issues, namely ensuring food security and to foster inclusion and a growing farming industry.

“The proposal that we submitted in 2016 was incorporated into the Mid-Term Budget Policy Statement (MTBPS) and included the proposals for support to commercial and emerging farmers, in the form of insurance for both. The speech was given by Former Minister of Finance, Nhlanhla Nene, who was shortly replaced with Former Minister of Finance, Malusi Gigaba. The project did not continue thereafter. This could have been attributed to NT’s priorities shifting,” continued Esterhuizen.

Where are we now? 

“SAIA is once again preparing documents, research and proposals for the Department of Agriculture, Forestry and Fisheries (DAFF) and NT to reinclude our original proposals in the national budget,” emphasized Esterhuizen.

“For this, we have created a Steering Committee of a very senior level to oversee this project, and we refer to this as the Agricultural Insurance Steering Committee. It is chaired by Cedric Masondo, Managing Director of Sasria. The committee consists of insurance executives from participating insurers, as well as executives from locally registered reinsurers. We have representatives of NT, the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA), International Finance Corporation (IFC) and the World Bank Group. We have also extended invites to representatives of financiers of farmers, the agricultural sector, the President of AFASA, Grain SA’s CEO, etc. We trust this will bring a better discussion to the profile of the project,” said Esterhuizen.

“The Steering Committee appointed Accenture to provide research on the profile of emerging farmers in South Africa. The research looked at the profiles of emerging farmers in each province and gives insight into the typical knowledge level and education of the farmers, technology used, affordability and understanding of insurance products. We have identified that there is still some work to be done in terms of consumer education and it is part of the project to educate these regular policyholders on insurance,” continued Esterhuizen.

The next steps as a committee 

“We are in the process of appointing another service provider that will conduct an economic impact assessment for us, in terms of what would be the outcome in the event that we do not have subsidy support from government for commercial and emerging farmers. With this assessment, plus our research on emerging farmers, we will submit a new proposal in 2019 to NT, to hopefully reintroduce what we had proposed in the 2017 MTBPS, which is support for commercial and emerging farmers in the form of subsidized insurance or financial support for reinsurance premiums,” stated Esterhuizen.

“The agri sector is a priority for government and we are supporting government’s priorities through our project. We believe our project adds value to South Africa, agri insurers, international and local reinsurers and is to the benefit of South Africa. We think Index Insurance is the right answer for emerging farmers. This is the right step to take for agri insurance in South Africa,” concluded Esterhuizen.

Editor’s Thoughts:
Well done to SAIA on its commitment to develop insurance solutions that are sustainable, affordable and valuable to the farming industry. Do you believe Index Insurance is the right answer for emerging farmers? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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