Agriculture is a risky business, especially for small-scale and subsistence farmers who are vulnerable to weather-related hazards. For most of these growers, agricultural insurance remains a dream due to it being either unaffordable or inaccessible. But index insurance could change all that.
Index insurance could be the solution to small-scale growers, however, this type of insurance solution remains largely unexplored and is not accessible to South Africans. So, what is it exactly and why can’t South Africans access it?
According to Santam’s head of agriculture, Daniel Stevens, index insurance is a type of insurance that pays out if a particular measure, for example, rainfall, is above or below a certain level.
Weather and yield cover
“Two examples in agriculture are the weather index insurance and yield index insurance. Currently, farmers in South Africa are not able to purchase this insurance as it is not part of the Insurance Act,” Stevens explained.
These products are ideal for small-scale farmers as their land size is smaller than a large farm where assessors need to visit the farm to determine damage. Unlike traditional crop insurance, the insurance company does not need to visit a farmer’s field to determine premiums or assess damages.
With index insurance, if the measure drops below, or is above, a predetermined level the policy will pay out to the farmer or the insured. This simply means there is no waiting period for an assessor to assess the damage.
Different options available
Stevens added that this type of cover is also suitable for small-scale farmers who have limited data and experience in traditional crop insurance.
“This product is used in crop insurance to limit expensive crop assessment costs linked to indemnity insurance. However, at the micro level a farmer will cover their production based on the measurement of a parameter at a weather station close to their farm.”
According to Stevens, the product at meso-level insurance may attract a financier who has provided crop finance to farmers in a particular geographic area and wishes to mitigate their credit risk against the possibility of drought in the area.
“Due to the nature of emerging farmers, this product caters to low costs of claims handling as there are no inspections at farm level.”
There are different index insurance products available. These include:
- Weather-based index insurance: This product is concerned with a predefined critical weather event such as soil moisture, rainfall, temperate, etc. Therefore the structuring of the index is based on the weather parameter. The pay-out on this product triggers when the insured parameter hits the agreed threshold.
- Area yield index insurance: This product is concerned with the reference yield per crop per region. The yield guarantee level is based on reference yield (usually the average yield in an area), and therefore a pay-out triggers when the actual yield falls below the guaranteed yield. This product requires significant yield history per crop and region.
- Normalised difference vegetation index: This index product is used to quantify vegetation greenness and is useful in understanding vegetation density and assessing changes in plant health that affect plant quality. A pay-out triggers when the measured parameter falls below the agreed threshold. The vegetation index is solely measured by satellite, therefore there is no loss assessment in the field. This is mostly suitable for livestock farmers for grazing purposes.
Santam recently did a pilot on a soil moisture index product. This was in conjunction with the South African Insurance Association, the department of agriculture, land reform and rural development, the Financial Services Conduct Authority, and the Prudential Authority.
A decision on whether it will be permitted is pending.
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