The primary objective of this study was to evaluate the effectiveness of Alternative Risk Transfer
(ART) against Short-term Crop Hail Insurance as risk management strategies for crop hail
insurance in two regions, Standerton and Lichtenburg. While Short-term Crop Hail Insurance has
a fixed premium as percentage of the value of the crop, the decision maker can determine how
much the contribution to the ART fund should be. Three different ART contributions had been
analysed; ART 25 and ART 50 with respective contributions equal to 25 % and 50 % of the gross
margin, and ART PC with a contribution equal to the premium of Short-term Crop Hail Insurance.
A farm financial simulation model was developed to simulate the influence of hail damage and the
different crop insurance policies on a maize enterprise with variable levels of yields and prices.
Since the historical data of hail damage and the data on yields and prices did not match the same
time series, the yield and price data were simulated with the procedure for estimating and
simulating multivariate empirical (MVE) probability distributions. The risk efficiency of the different
crop insurance options was analysed with stochastic efficiency with respect to a function (SERF).
SERF expresses the certainty equivalents in monetary values and enables the calculation of the
utility weighted risk premiums that are used to determine the benefit between alternatives.
The results indicated that hail damage does occur in both the Standerton and Lichtenburg
regions, but the impact thereof is not the same in each region. The negative impact of hail
damage on the cumulative probability distribution of the Net Present Value (NPV) after interest
and tax was larger in the Standerton than in the Lichtenburg. Decision makers in both regions
were willing to pay for crop hail insurance options, but much more so in Standerton than in
Lichtenburg. The difference between the costs and benefits of a crop hail insurance policy
determines the net advantage (or disadvantage) that it will bring to financial position of the
enterprise. The insurance options with the largest net benefit to the enterprise were ART PC in
Lichtenburg and Short-term Crop Hail Insurance in Standerton. However, in Standerton ART PC
emerged as the second-best option, which also makes it an option to consider. The last test for
effectiveness on the different crop hail insurance options was the ability of the different options to
provide continuous cover against hail risk. The differences between the claim pay-out of Shortterm
Crop Hail Insurance and ART PC indicate the instances where the ART PC was too small to
provide the necessary cover. While it can be concluded that ART PC is ineffective in Standerton,
owing to its inability to provide continuous cover and the large differences in pay-outs, the same
conclusion cannot necessarily be made for Lichtenburg. The differences in pay-outs are small
enough to be counter for by the decision maker, especially because the enterprise never returns a
negative NPV, even without insurance, while the financial impact on the enterprise and the
maximum benefit of the policy provides a total financial advantage for the enterprise. In conclusion, it was found that both Short-term Crop Hail Insurance and ART might be effective
measures for the mitigation of hail damage, as long as these products are implemented according
to findings of proper research for the option that will provide the enterprise with the largest net
benefit in the specific area it is situated. Since the model can easily be adapted to be applied not
only on other field crops, but also on horticultural crops with different types of risk perils, it is
suggested that the model might be applied to other sectors of agriculture to test the effectiveness
of insurance on these sectors.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:ufs/oai:etd.uovs.ac.za:etd-08212014-144904 |
| Date | 21 August 2014 |
| Creators | Maré, Frikkie Alberts |
| Contributors | Prof B Grove, Prof BJ Willemse |
| Publisher | University of the Free State |
| Source Sets | South African National ETD Portal |
| Language | en-uk |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.uovs.ac.za//theses/available/etd-08212014-144904/restricted/ |
| Rights | unrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to University Free State or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
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