Doing the rain dance in a summer of discontent
Weather patterns worldwide are changing. We have seen examples of this in South Africa where two years ago we faced heavy hail storms and heavy rainfall in certain areas.
This was followed by two years of significant drought in key farming areas in the country. The first was in KwaZulu-Natal (KZN), and now the Free State which is imposing the same water restrictions that were imposed in KZN in 2014. The Department of Water and Environmental Affairs has subsequently declared KZN and the Free State as disaster areas following the recent drought. Rand Water also recently announced water restrictions in Johannesburg in light of the recent lack of rainfall.
What are the effects of the drought on the insurance industry? We spoke with Gerhard Diedericks, Santam: Head of Agriculture, to clarify these issues.
Game changer
The first issue we discussed with Diedricks was the effects of changing weather patterns on the agri insurance industry.
“To give you an idea of how significantly catastrophic weather events can impact our business, we can compare the claims for 2014 and 2013. In 2014, Santam’s net catastrophe claims were R187 million, significantly lower than the R280 million claimed in 2013. This is because a number of catastrophic weather events in 2013 resulted in a loss-making of R142 million. The turnaround in the claims environment in 2014 resulted in an underwriting profit of R251 million in that year. This aspect of our planning and underwriting is very much at the mercy of the weather,” says Diedricks.
He adds that the below average rainfall and drought of the past four seasons has resulted in unfavourable insurance results for multi-peril crop insurance and forced insurers to revisit their underwriting strategies to ensure the sustainability of the sector.
“A few years ago, in response to changing weather, Santam restructured the core composition and ratio of its hail and multi-peril crop insurance to try and ensure sustainability for both farmers and Santam. This relates mainly to insurance products for grain crops, insurance against hail damage, and multi-peril crop insurance, which includes drought cover.”
Summer time sadness
We also pushed Diedricks to look into his crystal ball. We asked him what the outlook for the summer from an Agri perspective was. We wanted to know if insurers are preparing for a worst case scenario where there will be either severe rainfall or severe droughts.
“Weather experts are predicting an El Niño weather phenomenon, which increases the risk for drought and other extreme climate events like frost and hail. This is by no means a guarantee of below normal rainfall for the season; however, previous years where the El Niño phenomenon occurred resulted in below average rainfall in about 60% of cases.”
He adds that Santam has taken such weather events into account in its adjusted long-term view. Current rates represent the average over an extended period of time which includes both bad and good years.
The future and beyond
With changing weather patterns, we asked Diedricks what the future of Agri insurance in South Africa is.
“The agricultural sector needs the insurance industry to ensure the sustainability of farms and farmers, food security, employment and rural communities. Crop insurance remains one of the most effective methods through which farmers can manage the risks their crops are exposed to; particularly against hail damage,” says Diedricks.
“There are other ways in which farmers in drought-prone areas can mitigate their risks in the upcoming summer months. These include cultivation techniques that improve water infiltration, restricting evaporation losses, controlling weeds to ensure that available water is used only by crops. Using potential low production areas to produce silage or plant pastures to feed livestock during the winter months. A more conservative approach in terms of planting density is also advisable for the summer season,” adds Diedricks
Get the mix right
He adds that most insurers will continue to balance multi-peril crop and hail insurance in a mix based on sound underwriting practices; this is of critical importance to ensuring the sustainability of the agricultural sector.
“The onus will also be on farmers, and the agricultural community as a whole, to reassess and develop risk management tools. Weather-related changes will continue to impact the pricing and terms on which cover can be provided, but the extent will be significantly determined by farmers’ response to adapting to, and mitigating their risks and exposures,” concludes Diedricks.
Editor’s Thoughts:
This is a significant concern as produce is a major source of income in terms of exports for South Africa. With the mining sector currently in a demand slump, it is important that agriculture carries the load. Farmers need to be properly insured as El Niño could cause major problems. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
