Agriculture Flashcards
what is GF2 (going forward 2)
comprehensive federal-provincial-territorial framework for Canada’s agricultural sector
what are the BRMs (business risk management) programs in GF2
- agri-insurance: protects against production loss
- agri-stability: protects against margin decline
- agri-investment: investment fund for small losses
- agri-recovery: protects against disaster
- advance payments program: low interest loans for cash flow management
- WLPIP-Western Livestock Price Insurance Program: protects against fluctuations in livestock prices
purposes of the BRMs in GF2
- pure insurance purposes
- ensure availability and affordability of agriculture insurance to producers
- provide risk mitigation to promote industry stability
- support innovation and R&D in agricultural industry
- foster competitiveness
- enhance market development
- ensure sustainable growth
how are the BRMs programs funded
- agri-insurance, agri-stability, agri-investment, WLPIP: funded by producer-provincial-federal
- agri-recovery: funded by provincial-federal
- advance payment program: funded by federal
probable yield
expected yield of an agricultural product measures coverage in yield-based plans
balance-back factor
factors applied to aggregate premium to correct for individual discounts&surcharges
risk-splitting benefits
indemnity based on a subset of production for a given agricultural product
reinsurance load
to account for reinsurance costs when the province purchases reinsurance
uncertainty load or risk margin
a load in rates to account for limitations in data, assumptions, methods
self-sustainability load
a load in rates to recover deficits & maintain suprlus
reason for uncertainty, self-sustainability load
- uncertainty load: covers future contingencies
- self-sustainbaility load: recovers past deficits
what is the content of actuarial certification
the actuarial certification should provide an opinon on:
- method for calculating probably yield for deriving exposure for yield-based plans
- method for pricing
- sustainability of program
why is actuarial certification required
for federal funding
how often is actuarial certification required
- frequency is determined using a risk-based approach
- at least every 5 years
what triggers the requirement of a new certification
- significant changes in program desgin or methods
- new crops
briefly describe the purpose of probable yield tests
to prevent over-insurance
key elements of Canadian Agri-insurance regulation
- min ded of 10%
- probable yields must reflect demonstrated production liabilities to prevent over-insurance
- rates must be actuarially sound include self-sustainability load + relevant costs
- actuarial certification is required (if uncertified, then federal government may reduce premium contributions to province)
identify the main types of Agri-insurance plans & provide examples of each
- yield-based plan (individual or collective)
- non-yield-based plan (weather derivative, acre-based, mortality for livestock)
when does yield-based plan pay
pays when: (individual or collective production < production guarantee) for a specified agricultural product
define proxy crop coverage
when payment rate for a given crop is based on payment rate for another crop with more reliable production, price data
what is coverage trigger for a non-yield-based, weather derivative plan
when pre-determined meterological thresholds are breached regardless of actual production
what is coverage trigger for a non-yield-based, tree mortality plan
when more than a certain % of trees are destroyed by an insured peril regardless of actual production
what is the formula for probable yield in a yield-based plan
average of yearly production yields
what is the purpose of adjustments to historical yields
to reflect current production capability
what are the triggers for making adjustments to historical yields
- a change in farming or management practices
- a change in insurance program design
- a change in data source or data collection technique
- maturity of prennials (yield would vary over their life cycle)
- quality variation of crop from year-to-year due to insured perils or other cause
what actuarial input is required regarding the adjustments to historical yields
- review trends
- disclose reliance on agricultural experts for other adjustments
stablizing methods for probably yields
(Alice Can Select Cool Smoothing Techniques):
- Average: use a long-term average of historical yields
- Cap: cap data to limit year-over-year changes
- Split: split basic & excess coverage since excess coverage is more volatile
- Cushion: give data outliers smaller weights when averaging to cushion their effect
- Smooth: apply floor/cerilings to data points to smooth the effect of outliers
- Transition: use transition rules after introducing a new yield method to smooth the transition
formulas for yield-based plans: production guarantee (PG) & liability (L)
PG = APC
L = APC * insured unit price
where
A = insured area
P = probable yield per unit of area
C = coverage level %
formulas for non-yield-based plans: production guarantee (PG) & liability (L)
no formula for PG
L = insured units * insured unit price
formulas for yield-based plan indemnity
Indem = max(0, PG-AP) * insured unit price
types of weather events that are coverd in non-yield-based plans
excessive rainfall, drought, freeze
variables that affect compensation in non-yield-based plans
think about the formulas
units affected, insured price, deductible
units affected, insured price, deductible
what are included/excluded in rate calculations for production in insurance programs
- included: expected loss only
- excluded: administrative costs are shared between federal & provincial government
formula for premium in production insurance programs
prem = premRt * L
formula for indm & indemRt in production insurance programs
indem = indemRt * L
first calculate indem using indem = max(0, PG-AP)*insured unit price, then calculate indemRt using this formula
what are the consequences of rate instability
flutuations in participation, adverse selection
what load factors must be incorporated to arrive at the final PremRt
start with indemnity rate then incorporate:
- uncertainty margin
- balance-back factors
- individual discount/surcharge
- reinsurance load
- self-sustainability load
pricing considerations for weather derivative plans
- data: long-term history of meterological data vs. producer data
- effects: how weather affects production losses
cost-share levels in production insurance programs
3 cost-sharing levels depending on the severity of the loss:
- comprehensive: 0-80% of the overall loss distribution
- high: 80-93% of the overall loss distribution
- catastrophic: 93-100% of the overall loss distribution
how are costs shared between producer, provincial, federal governments
costs are shared based on the loss level:
- comprehensive: producer, provincial, federal
- high: producer, provincial, federal
- catastrophic: provincial, federal
(administrative costs are shared by provincial, federal)
what is federal requirement for self-sustainability (statistical definition)
for all base&adverse sceanrios:
- calculate the 95th percentile of the fund balance at the end of the 6th year
- rerun the scenario with that starting point
then the program is self-sustainable if deficit recovery occurs
- within 15 years on average and
- within 25 years with 80% probability
basis for the self-sustainability load selection
load basis = selected target surplus level, and can be expressed in different ways
- value
- % of liability dollars
- multiple of premiums
- percentile over a given time horizon
basis for the self-sustainability test
25-yr stochastic simulation of financial position
what is the source of volatility in stochastic simulations of self-sustainability
mainly the indemnity component:
- because the probably yield & premium rate methodologies are designed to avoid large year-to-year variations
what is the actuary’s role regarding the self-sustainability test
the actuary should design or confirm methodology for calculating the self-sustainability load
identify adverse scenarios relevant to self-sustainability in agri-insurance
- increase in liabilities (increase max exposure)
- decrease in liabilities (this can be severe when surplus vulnerable after cat since future premiums are lower & deficit recovery takes longer)
- adverse claims experience
- introduction of a new insurance plan
- deterioration in market value of investments
- combination of the above scenarios
compare agricultural self-sustainability to DCAT (similarity, difference)
- similarity: both have base&adverse scenario
- difference: agricultural self-sustainability uses a fully stochastic simulation over a longer time horizon
is government insurance for agri-insurance considered traditional reinsurance
- no, it’s an optional deficit-financing scheme
- province may finance deficits as they occur vs. regularly contributing to a government reinsurance fund
describe the funding mechanism for government reinsurance for agri-insurance
- provincial producer programs contribute a % of premium to provincial&federal reinsurance
- amount is based on surplus position&risk profile
- must self-sustain for 25 yrs
what triggers government reinsurance for an agri-insurance program
- when surplus of the production insurance fund is depleted
- note that the indemnities net of private insurance are paid out of production insurance fund first
roles & responsibilities of federal government in agri-insurance programs
- develop guidelines for production insurance programs
- provide financing mechanism when programs are in deficit position
roles & responsibilities of provincial government in agri-insurance programs
- determine probable yield, premium rate
- manage claims
roles & responsibilities of the producers in agri-insurance programs
- pay their share of premium
- report yields
roles & responsibilities of the private insurance & reinsurance in agri-insurance programs
- private insurance: provide coverage for producer for perils not covered under government insurance
- reinsurance: provides reinsurance for government insurance
evalulate the government agricultural insurance program
- welfare or insurance? Insurance, because producers pay premiums and government pays covered losses
- efficient? Yes, because government uses existing infrastructure and doesn’t make profit
- necessary? Yes, because farmers rely on the income stability the government program provides
compare different triggers for:
- actuarial certification
- historical adjustments to probable yield
- risk transfer test
actuarial certification:
- significant changes in program design or methods
- new crops
historical adjustments to probable yield:
- a change in farming or management practices
- a change in insurance program design
- a change in data source or data collection technique
- maturity of perennials (yield would vary within their life cycle)
- quality variation of crop from year-to-year due to insured perils or other cause
risk transfer test:
- inception of contract
- when contract change significantly alters expected future cash flows
examples of areas where actuarial certifications are required
- agricultural insurance production programs
- risk transfer analysis
- valuation of reserves
- rate filings
examples of areas where transition rules are used
agricultural insurance - probable yield calculation:
- after a new methodology is introduced
- use ‘transition rules’ or ‘stablizing methods’ to prevent sudden large changes
rating:
- prevens individual policyholders from getting a big rate change all at once
examples of ares where stochastic models are used
- agricultural insurance: for adverse scenarios in self-sustainability model
- DCAT scenarios: when risk distribution is easily inferred
- MfADs: where the cost distribution is skewed, and deterministic methods may not work well
