Changing agricultural landscape calls for strengthened risk mitigation - Saving on insurance premiums vital for farmers facing tough times

The South African agricultural landscape is changing. There are familiar risks, such as droughts, food security, and changing weather patterns. The last six months have however, highlighted new risks that farmers have to contend with including possible ch

“Farmers in South Africa have come under increased financial pressure over the past few months due to government’s introduction of the new labour wage following major unrest and strikes last year which on their own cost the agricultural sector millions of Rands in losses,” says Riaan Louw, Head of Santam Agriculture, South Africa’s leading crop and asset insurer.

As announced by the Labour Minister, Mildred Oliphant, the minimum daily wage for farm workers has been increased by 52% to R105, effective from 1 March this year.

Farmers are feeling the financial strain and some have had to lay off approximately 10 to 15% of their labour force as a result of the high wage increase, which in turn affects farm operations and the overall agricultural output.

Some farmers are still recovering from losses incurred caused by the devastating natural disasters from last year, with 2012 recorded as one of the worst years for catastrophes in South Africa. Extreme weather conditions, flooding and out of control veld fires caused enormous damage, destroying crops and assets alike.

“All these financial pressures are causing farmers to find ways of reducing costs wherever possible. The next two years are deemed critical for the agricultural sector to adapt with the new wage bill and reassess risk management for their business,” adds Louw.

Insurance can be one of the expenses farmers are looking at reducing as they are tempted to decrease their insurance cover or cancelling policiesaltogether as a way to manage costs in their businesses.

“Although such actions might provide short-term relief, in the long term the farmer doesn’t benefit. The biggest problem with this practice is that farmers are reducing their cover in times when their margins are lower and consequently their capacity to recover from an adverse event due to lower cash flow,” says Louw.

He adds that instead of cutting down on insurance, a crucial element for farmers is effective risk management, as this can help keep premiums low by avoiding claims.

It is vital for farmers to be aware and understand all the risks they face during these tough times and look at ways to manage them. By having good risk management practices in place, farmers can avoid unnecessary losses.

The five most common agricultural risks that farmers face include:

• Production: These risk sources affect the quantity and quality of commodities produced. Weather is the primary risk and refers to hail, frost, drought, excessive rainfall, floods and landslides. It also includes insects, pests and disease damage.

• Market / Prices: These risks refer to prices producers will receive for commodities or the prices they must pay for inputs and the nature of price risk varies significantly from commodity to commodity. Other risk sources include loss of market access due to relocation or processing plan, new requirements from food industry etc.

• Financial: This is when the farm borrows money and creates an obligation to repay debt. Other risk sources include rising interest rates, the prospect of loans being called by lenders, inflation, cost increases on key inputs and changes in interest and exchange rates, value of financial assets and access to credit.

• Legal: These include liability risk, changes in local policy and regulations, changes in regional or national policy, environmental low and agricultural payments.

• Human resource management: Risks concerning death, disability and illness of an owner, manager or employee. Also refers to factors such as succession, estate problems, wellness, or human relationships which the impact the viability of the farm such as divorce, sibling rivalry, and intergenerational issues.

“As the country’s biggest insurer, Santam carries the responsibility to help policyholders both mitigate risk and recover quickly when disaster strikes. The majority of claims received from farmers are derived from fires and weather conditions. We urge farmers to not make hasty decisions with regards to their insurance. Not being covered when unexpected losses occur, can only lead to financial catastrophe for farmers,” adds Louw.

He suggests that should farmers need to cut down, it is better for farmers to lower their premiums than not to be insured at all. “Our brokers with their specialised expertise are there to help farmers address their needs, assess their risks accordingly and assist in any policy alterations,” concludes Louw.

Farmers should retain their current cover and consider the following tips to save on insurance premiums:

• Combine crop and asset insurance. Farmers can qualify for discounts on their insurance premiums.(Conditions do apply)

• Update insurance policies annually. Agricultural brokers are critical in working with farmers and producers, and will conduct a risk survey of the enterprise to ensure that the insured is not under insured, as many farmers tend to undervalue their building structures.

• Opt to carry the financial responsibility for certain risks. Farmers who have enough disposable capital should still take out insurance. However, conduct a risk evaluation of the farm to determine which risks a farmer is able to cover personally. Farmers who are in a position to make a bigger excess payment can also reduce their premiums.

• Consider the long-term. As farming is a long-term business, farmers should consider ways to save on insurance premiums over a longer period of time, and re-assess risk annually and this can offer significant long-term cost savings.

• Farmers can also save money by requesting that brokers adjust the market value of vehicles annually. Buildings and the value of their contents are automatically adjusted in keeping with inflation.

• Join a Fire Protection Association (FPA). Santam Agriculture will reward clients who are members of FPAs with more competitive insurance premiums in the form of discounted rates as well as premium and excess incentives. Being a member of a FPA is a proactive way to reduce and manage risk. (Conditions do apply)