How to choose the right farm insurance to protect your business

Farm insurance is often viewed as a grudge purchase, yet in an environment defined by climate volatility, rising input costs and limited state support, it has become a core business tool rather than a nice-to-have.

Agricultural economist and Land Bank Insurance strategic partnerships manager, Lunga Njara, unpacks what insurance really means for farmers, the options available, and how to make informed decisions that protect the farm business.

At its core, insurance is about managing risk. According to Njara, it forms one pillar of a broader risk management strategy.

“Insurance is essentially a risk-transfer mechanism. In farming, you can either avoid risk, absorb it, or transfer it – and insurance is how you transfer that risk,” he explains.

For farmers, this means paying a relatively small premium in exchange for peace of mind that crops, livestock or assets are protected if disaster strikes.

“Our role as insurers is to ensure that when a farmer has planted, invested in livestock or acquired assets, those interests are protected so that one adverse event doesn’t wipe out the business,” Njara says.

Why insurance is no longer optional

According to Njara, insurance should be treated as a business necessity.

“Agriculture operates in a uniquely challenging environment, particularly from a climate perspective. Farmers are exposed to frequent and severe perils such as hail, frost, drought and floods – and climate change is intensifying these risks.”

Unlike some countries, South Africa does not have a dedicated agricultural insurance subsidy scheme.

“That means farmers need to factor insurance into their business strategy, rather than relying on external support when losses occur,” he says.

The main types of farm insurance

Njara outlines two broad categories of agricultural insurance available in South Africa: indemnity insurance and parametric (or index) insurance.

1. Indemnity insurance

Indemnity products compensate farmers based on actual losses suffered.

Crop insurance falls into this category and is typically divided into:

Named-peril (single-peril) cover, which insures against specified risks such as hail, frost or fire.
Multi-peril crop insurance, which offers yield-based protection against most natural perils, is subject to exclusions. This type of cover requires robust historical yield data, usually over five years or more.

Livestock insurance provides mortality cover for animals such as cattle, sheep and goats.

“This usually covers death due to accidents, fire, lightning, disease outbreaks and specified transit risks,” Njara explains, noting that additional extensions are available at higher premiums.

Insurance allows farmers to transfer risk rather than absorb catastrophic losses. Photo: Pexels

Asset and property insurance protects farm infrastructure

This includes tractors, implements, buildings and storage facilities, against risks such as fire, storm damage, theft and accidental damage.

2. Parametric (index) insurance

Parametric insurance is a newer, more innovative approach that pays out when a predefined trigger is met, rather than after a physical loss assessment.

“These products focus on deviations from the norm,” Njara says. “If rainfall is significantly below or above expected levels, that deviation triggers a payout.”

Examples include:

Area yield index insurance, which measures average yields across a defined area.
Weather-based index products, such as rainfall, soil moisture or forage-deficit indices for livestock farmers.

However, Njara cautions that parametric insurance is not yet fully legislated under the Insurance Act, and products require regulatory approval before being offered.

Seven essentials for farmers before approaching a broker

One of the most common mistakes farmers make is approaching an insurer without adequate preparation.

He stresses the importance of working through a broker and having the right information ready, including:

Accurate farm data, particularly GPS-coordinated maps showing individual fields. “If only one field out of ten is hit by hail, both the farmer and insurer need to know exactly which field is insured,” he explains.
A clear seasonal production plan, including hectares planted, crops grown, livestock numbers and breeds.
Expected yields and commodity prices, which form the basis of the sum insured.
A detailed asset inventory, with current values for machinery, buildings and equipment.
Livestock details, including age, purpose (breeding, dairy, beef) and management system.
Administrative documentation, such as registration details, tax numbers and payment preferences.
A realistic insurance budget.

“Preparation is key to ensuring cover is accurate, appropriate and cost-effective,” Njara emphasises.

How farmers should compare insurance options

Insurance brokers sell products, so farmers must be active participants in the decision-making process.

“You need to understand your own risk profile before you sit across the table from a broker,” Njara says. “Otherwise, you may end up accepting cover that doesn’t truly meet your needs.”

He advises farmers to focus on one fundamental principle: insurance should place you back in the same financial position you were in before the loss.

“If insurance leaves you worse off, it wasn’t the right cover. And insurance should never be seen as a way to profit – that only leads to higher premiums.”

According to Grain SA, crop insurance is classified as an agricultural input, which means VAT must be applied. When a producer purchases a policy, they can reclaim the VAT from the South African Revenue Service (SARS). However, when a claim is paid out, the settlement amount will include VAT, and the producer is required to remit this VAT. To facilitate this process, the commodity price used to calculate the value per ton must include VAT.

What drives premium costs?

Premium costs vary significantly depending on the type of cover and the level of risk involved.

For crop insurance: Key drivers include the farm’s location and associated environmental risks such as hail belts, flood-prone areas or drought sensitivity, as well as the type of crop and its susceptibility to specific perils.

Insurers also assess historical yield performance and claims records, alongside the sum insured, which is calculated using expected yields and prevailing commodity prices.

Policy structure plays a further role, particularly the choice between an excess and a franchise. As Njara explains, an excess (or deductible) lowers the premium but is deducted from every claim, while a franchise sets a loss threshold that, once exceeded, allows claims to be paid in full, although this comes at a higher premium.

For livestock insurance: Premiums are influenced by species, breed and age profiles, the production purpose such as breeding, dairy or feedlot operations, health status and management systems, as well as location-specific disease and predator risks.

For farm assets: Insurers consider whether cover is based on replacement or market value, the level of exposure to insured perils, and the security measures in place to mitigate risk.

“I generally advise farmers to insure assets at replacement value rather than market value. Market values can drop, leaving you short when you need to replace equipment,” Njara says.

Ultimately, Njara encourages farmers to view insurance as part of long-term business sustainability. “Insurance is not just about compliance or protecting a loan. It’s about ensuring continuity – that after a shock, the farm can still operate, repay obligations and plant again.”