How index insurance is building resilience for the country’s farmers
Farmers are conservative by nature; they rely on the predictability of the seasons, the certainty of crop cycles, and weather patterns. It would be reasonable to assume they would be wary of the hype around artificial intelligence (AI). Farmers today, however, operate in an increasingly unpredictable environment—from severe droughts and erratic rainfall to damaging wildfires—raising questions as to how to manage these risks. It’s not just their livelihoods at stake, but the nation’s food security and economic stability as well.
In 2024, to address and improve agricultural risk management, South Africa’s regulators approved index insurance product for weather related risks. AI-powered tools in agri-insurance are now shifting the focus from indemnity to building resilience and prevention.
Supported by the South African Insurance Association (SAIA) and its members, farmers can now utilise innovative insurance tools to help them weather the storms. Using the Internet of Things (IoT), insurers aim to move beyond blunt monthly rainfall indices by tapping real-time environmental and soil moisture sensors—embedding field-level nodes, soil probes, weather stations, and satellite feeds—to calibrate the parametric triggers more granularly, reducing the gap between the index and actual loss (basis risk).
Pamela Ramagaga, General Manager of Insurance Risks at SAIA, stated that transformative risk management tools like index-based (parametric) insurance are gaining momentum as progressive solutions to build resilience among vulnerable farmers. “Index insurance can be a very powerful tool in empowering small-scale farmers to increase their resilience to weather shocks such as droughts or floods, while also encouraging investments in productivity that, in good years, create a pathway to prosperity. Although adoption has been slow, there is clear appetite within the market. We believe that with scaled government partnership, this product can achieve the scale needed to truly transform agricultural insurance and unlock its full potential for South African farmers.
“The regulatory green light is a landmark step, enabling insurers to offer targeted, transparent, and timely responses to climate risks faced by our farmers,” stated Ramagaga. Almost three (3) ago, Santam was SAIA’s representative to test soil moisture deficit (drought) grain crop index-based insurance through the Regulatory Sandbox (RSB), which is an Intergovernmental Fintech Working Group (IFWG) at the Financial Sector Conduct Authority (FSCA) offices. Since then, Santam is one of the insurers who has been successful in its application to the Prudential Authority (PA) to underwrite weather-based index insurance.
Traditional indemnity insurance requires complex and costly individual loss assessments that are often delayed when farmers need support the most; parametric (index-based) insurance provides a streamlined solution with payment based on the occurrence of specific, predefined events, like objective weather parameters (e.g. rainfall measured at specific stations over a set period) rather than individual farm losses. When the index falls below or exceeds an agreed threshold (e.g., insufficient rainfall during a critical growing phase), an automatic payout is triggered. This simplicity translates into benefits such as rapid payouts, lower and flexible premiums, and transparent, indexed reporting in risk assessments.
In the face of increasing climate uncertainty, SAIA has supported bringing these products to market, piloting solutions and advocating for the necessary framework that would protect agricultural productivity. De-risking agriculture encourages investment, supports emerging smallholder farmers as they enter commercial markets, and fosters financial inclusion by introducing formal financial risk management tools to previously underserved rural communities. This initiative represents a new frontier in agricultural resilience and risk management through a groundbreaking public-private partnership that aims to shield farmers from climate and biosecurity risks.
“The escalating climate risks facing our agricultural sector demand innovative and accessible risk transfer mechanisms,” said Ramagaga. “Index-based insurance represents a breakthrough for building resilience among smallholder and emerging farmers. SAIA is committed to fostering the partnerships and enabling environment needed to scale these solutions effectively.”
To foster inclusion and economic stability in rural communities, SAIA has engaged with the Department of Agriculture, Land Reform, and Rural Development (DALRRD) to pilot broader implementation of scaling insurance products and advocating for essential premium subsidies for small-scale farmers. The government subsidy of insurance premiums—up to 75% for small-scale farmers and 25% for commercial farmers—enhances the sustainable uptake of drought insurance, facilitating broader coverage across various agricultural segments. Subsidies enhance resilience, safeguard livelihoods, and reinforces long-term food security.
SAIA
