How short- term insurance can protect the agric community from eventualities

How short- term insurance can protect the agric community from eventualities.

By Jasper Manyika

There is no dispute to the fact that agriculture is not only the oldest profession, but it is in fact the first for humanity ordained in the sacred garden.

Throughout history people have grown various crops for own food, butter trade, international trade and as raw materials for the manufacturing sector.

Again our fathers kept animals not just to surround them during winter for heat in the medieval times but for food, commerce, wealth, lobola and the like.

The centrality of agriculture to human life is beyond dispute as every life is sustained by what the fields produce each year.

Effective agriculture is thus a key part of life at different levels.

The small holder farmer, for example, in Dotito relies on it for provision of household food such as mealie meal, cooking oil, relish and sometimes sells to make some income. At a commercial level it goes without saying agriculture is at the centre of some big enterprises in Zimbabwe.

Running any form of business comes with its own inherent risks. The small holder farmers depends on the rains from the heavens but who knows with certainty if the rainfall and temperature combination will be favourable in the season to come?

Over the years we have had successive droughts threatening not just the source of food but also source of income.

At a commercial level the risks can be unimaginable given the forward and backward integrations that exist.

To stay in business you need to think about a rainy day and plan in advance on how you can remain standing when unforeseen and unfortunate events happen and threaten the very human enterprise and existence.

The obvious answer would ordinarily be insurance but let me hasten to say that what is more important is risk management to which insurance is just a small part as I shall explain in turn.

It is largely unfortunate that many times people sell insurance which is a product push approach, rather than providing a simple risk management solution which is an approach hinged on understanding the unique circumstances of the farmer.

In risk management basically you take a holistic view of the activities that the farmer is engaged in, say growing of tobacco, maize, wheat, animal husbandry and market gardening.

Without complicating matters in medieval times, society has managed risks for example ‘zunde ramambo’, chema, which were all risk management techniques.

To this end society has always been aware of risks they faced and had incorporated in their way of life the means of dealing with those hazards.

It takes us to the importance of identifying the risks that any farmer faces and  it is important to note that any farmer is a unique business.

The uniqueness requires that the risk management process is tailor-made to address the distinctive circumstances of the particular famer.

The first stop is conducting risk identification which might sound very complicated but it’s purely an exercise of going through the enterprise and listing the inherent risks.

For a tobacco farmer, it is key to note that the crop is prone to damage by hail and windstorm, catching fire when processing or being stolen when transporting to the Auction floor.

The maize crop, for all intents and purposes is a grass and highly susceptible to fire damage.

Winter wheat and barley on the other hand are grasses as well and fire damage can cause extensive losses.

Early rain is also a unique vagary that causes technical losses in that whilst physically the wheat or barley is there, once hit by the rain, the crop becomes unfit for purpose. On the market gardening side, the risk of fire is minimal but the theft risk is high.

I should quickly point out that theft in insurance carries a different meaning from everyday use in the sense that for theft to occur, there has to be use of force to gain entry or exit.

It is clear that the process of identifying risks is at times a cumbersome exercise in which a farmer has to evaluate the hazards in terms of likelihood and potential loss outlays.

At this stage it is a ‘what if process’. What if hail strikes all the tobacco, will the business stand that loss? What if fire was to gut all the wheat crop and so on etc.? By asking these questions the farmer can create a pictorial outlook of what could happen which leads to the next logical question that is what to do with the risks that the farmer faces.

The strategy or solution matrix to the risks that a farmer faces are the action steps to put in place practical mechanisms to manage risks.

In theory, there are about four strategies that I shall briefly describe.

The first one is risk retention. In every enterprise there are risks that are ordinarily retained but the general rule is that they must rarely occur and even if they occur the impact must be very low.

The second strategy is risk transfer and this is where insurance is just but one of the solutions. Instead of retaining the risks the farmer can transfer, low frequency but high exposure risks suited to insurance.

Thirdly, risk mitigation strategy is used to alleviate risks that cannot be transferred, for example, by digging a proper drainage system the farmer softens the risks of flooding, loss of nutrients due to leaching among other things.

The fourth category strategy is simply risk avoidance. In this category there are high frequency and high impact risks. In theory this is a very easy process but in practice the farmer needs the expertise of seasoned professionals to determine the most appropriate strategy to contain risks they face.

It is also important to address the general question on many people’s minds: How can insurance protect an agricultural community from many vagaries faced in that industry?

As explained earlier, insurance solutions are best suited to rare events but whose cost outlay has potential to bankrupt the famer.

In my career I have seen that the journey from hero to zero is just a few hours especially without the protection that insurance provides.

In recent times, breath-taking pictures, the aftermath of violent windstorms leaving a trail of destruction with millions worth of crops damaged are common thread on social media. The story of successive droughts again in recent memory for Zimbabwean farmers threatening farm production, food security and the economic wellbeing not just of farmers but the nation as well are documented.

These events point to the fact that risk is in almost all human endeavour but as they say it’s precarious to risk nothing because profit is an outcome of assuming risk.

Over the years the insurance market has evolved to respond to the various vagaries faced in the farming community. As early as 1930’s the market was already providing hail and windstorm insurance through a cooperative which later became an insurance company specialising in tobacco insurance and other crop insurances.

In the last 5 years hail and windstorm claims have dominated insurance claims as the incidences of whether vagaries have increased.

Many farmers who would otherwise have been out of business are still in the game because of insurance. There are also cases of farmers who have gone out of business, having failed to pay their loans after the crop was damaged by insurable perils and many instances of farmers struggling to recover.

The investments made in the tobacco sector over the last decade by government, contractors and individuals farmers are testimony to the availability of insurance tools to manage risks so that there is compensation in the event of losses.

This is also true with many other crops like maize, soya bean, sugar beans, wheat and barley where there are specialised insurance products available to address insurable losses.

Deliberately I use the word insurable because, insurance doesn’t cover everything as such anyone who buys it must be aware of its limitations.

Drought for example, whilst there is limited coverage now in the market, it remains one of the most challenging risks to address for the insurance market. This is so because drought, whilst fortuitous, can be predicted leading to many people only wanting to buy the protection in the year it is highly likely to occur.

To this end there has been market initiatives, mainly donor funded, to look at Weather Indexed Agriculture insurance to provide drought insurance with very little success. There are many initiatives on this front which are in their infancy to try and address the drought risk.

Short term insurance therefore can provide solutions across a wide spectrum of activities from crops, aquaculture, poultry, piggery, cattle ranching.

For almost any human endeavour, there is need to have a level of confidence that if things go wrong there is a capable hand to compensate and short term insurance is indeed a capable hand.

I must as I conclude say that, the purchase of insurance requires the involvement of the farmer and the expertise of a seasoned adviser to settle on the optimum solution to risk so that the farmer derives value from the risk management program.

Manyika is a seasoned risk management and insurance professional, An associate of the Chartered Insurance Institute ,Holder of Bcom Risk Management and Insurance degree from NUST ,Holder of an MBA from the UZ. He has over 11 years of practice in the Insurance & Risk management field in Southern Africa.

He can be reached on [email protected]