An economic evaluation of a crop insurance programme for small-scale commercial farmers in South Africa

Abstract

Hail insurance is provided by the private sector in South Africa but crop insurance (drought insurance) programmes, after a promising start, failed to attract customers. A crop insurance programme (drought) for small-scale commercial farmers, who are not yet paying tax, has been recommended to government. The purpose in this research is to study the economic viability of such a programme drawing on the US experience. The US programme is well developed but heavily subsidised. During 1998 US growers paid $900 million in premiums while during 199598 the US government spent $1.2 billion per year on subsidies. An area insurance plan (farmers are insured as a group) is shown to be more appropriate for small farmers growing dryland field crops such as maize because risk is systemic (drought related) while adverse selection, moral hazard etc are overcome. Individual crop insurance will not be viable due to the cost of farm visits (verification of claims) and the non-availability of information. As a large part of the cost to government goes to administration of crop insurance it is recommended that an Income Equalisation Deposit (IED) scheme for small growers receive serious consideration with the government making a contribution as for example in Canada.