The trend of under-insurance in the agricultural industry

The South African agricultural landscape is changing. Deliberations around land ownership and the weakening rand add to the environmental stresses that the agricultural industry is currently facing.

State of affairs
Agriculture contributes 12% to South Africa’s gross domestic product. 20% of farms supply 80% of the food used in the formal retail chain and an additional 220 000 emerging farmers, plus two million subsistence farmers, contributed around 5% to the national commercial food crop. According to the Agricultural and Environmental Affairs departments, a 25% decrease in yields from these crops can be expected.

There is a growing trend for the agricultural industry to be under-insured, or not insured at all, particularly when it comes to crops and livestock. Agricultural insurance is one of those expenses farmers will cut in an effort to reduce monthly business costs which provides short term relief but endangers farming operations in the long term.

Two key contributors to under-insurance is the fact that farmers tend to underestimate the replacement value of farming equipment and they do not review their policies regularly. As a result, the percentage of South Africa's farmers who are underinsured is potentially as high as 70%. Another reason for under-insurance is the rapid increase in the cost of agri-processing equipment, vehicles and other assets due to advances in technology and functionality. In addition, input costs such as fuel and fertiliser are often imported and therefore subject to unfavourable exchange rates.

Increasing pressure
Record-high price hikes in fuel and electricity as well as a 52% increase in the minimum daily wage for farm workers resulted in some farmers laying off 10-15% of their labour force; this caused a reduction in overall agricultural output. All these financial pressures are causing farmers to find ways of reducing costs wherever they can.

Risk management is necessary
Farmers need to become skilled risk managers in order to avoid claims which will keep premiums low. It is important that they fully understand the risks associated with their businesses so they can learn to manage it better. Updating insurance policies annually and thorough risk assessment surveys are imperative to ensure that adequate insurance is in place for farming operations.

Consider the long-term
Farmers should focus on finding ways to save on insurance premiums over the long term and then re-assess risk annually. Building structures are often undervalued, so care should be taken here.
Farming operations also carry a high potential risk for liability claims concerning products, spread of fire, employees, hunting, etc. and this should be covered in their policies.

Where fire is a major peril, farmers should consider joining a Fire Protection Association (FPA) as a proactive measure to reduce and manage risk. Some insurers reward clients with more competitive insurance premiums for being members of FPAs.