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Exam 6C (Fall 2018) > B - Agricultural Programs > Flashcards

B - Agricultural Programs Flashcards

1
Q

AGRICULTURAL PROGRAMS

AGRIINSURANCE Program.

funding?

2 included margins
1 excluded margin

A

protect from PRODUCTION LOSSES from natural hazards (hail, drought, flood, disease)

-experience rated to encourage good behavior and participation

Funding : PRODUCER / PROVINCIAL / FEDERAL
40 / 24 / 36
Admin Exp :
0 / 40 / 60

Non-for-profit: do not include a profit margin
but include self-sustainability load and uncertainty margin

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2
Q

AGRICULTURAL PROGRAMS

AGRISTABILITY program

payment?

Funding?

A

protect from LARGE DECLINE IN ANNUAL PRODUCTION MARGIN

Payments in year where producers see a decline in annual production margin of at least 30% of reference margin

Program pays 70% of shorfall

ReferenceMargin : 5-year avg margin, excl. best and worst years

Payment = 70% * [(ReferenceMargin * 70%) - ActualMargin], if above 0$.

Funding : PRODUCER / PROVINCIAL / FEDERAL
0 / 40 / 60

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3
Q

AGRICULTURAL PROGRAMS

6 crop insurance programs

A

Agri-Insurance
PROTECT FROM PRODUCTIONS LOSSES FROM NATURAL HAZARDS

Agri-Stability
PROTECT FROM LARGE MARGIN DECLINE

Agri-Invest
INDIVIDUAL INVESTMENT FUND TO MITIGATE SMALL INCOME LOSSES

Agri-Recovery
PROTECT FROM EXTRAORDINARY COSTS TO RECOVER FROM DISASTERS

Advance Payments Program
LOW-INTEREST LOANS FOR CF MANAGEMENT

Western Livestock Price Insurance Program
PROTECT FROM PRICE DECLINE OF LIVESTOCK

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4
Q

AGRICULTURAL PROGRAMS

3 drivers of declines in annual production margin, triggering payment under AGRISTABILITY.

A

1) LOW commodity PRICES
2) HIGH input COSTS
3) PRODUCTION LOSSES

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5
Q

AGRICULTURAL PROGRAMS

AGRIINVEST Program

Funding?

A

producer can accumulate funds to manage small income loss

producer can deposit up to 100% of their allowable net sales and govt will match 1st 1%, up to a limit of 15000$ per year

fund limited to 400% of avg allowable net sales

producer can withdraw from fund at any time

Funding : PRODUCER / PROVINCIAL / FEDERAL
0 / 40 / 60

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6
Q

AGRICULTURAL PROGRAMS

AGRIRECOVERY

Funding?

A

Protect from extraordinary costs to recover from natural disaster events (disease, pest, weather-related)

To cover costs not recoverable through other programs

Funding : PRODUCER / PROVINCIAL / FEDERAL
0 / 40 / 60

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7
Q

AGRICULTURAL PROGRAMS

ADVANCE PAYMENTS PROGRAM (APP)

funding?

A

provide loans with low-interest to help with CF management

Funding : PRODUCER / PROVINCIAL / FEDERAL
0 / 0 / 100

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8
Q

AGRICULTURAL PROGRAMS

WESTERN LIVESTOCK PRICE INSURANCE PROGRAM

funding?

A

protect from price decline of livestock.

Funded with put options (payment triggered when price decline relative to expected price)

Funding : PRODUCER / PROVINCIAL / FEDERAL
100 / 0 / 0
(actuarially sound, self-sustaining)

Admin Expenses :
0 / 40 / 60

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9
Q

AGRICULTURAL PROGRAMS

balance-back factor (off-balance factor)

A

off-balance factor ensuring that overall premium is adequate while having relativities among producers

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10
Q

AGRICULTURAL PROGRAMS

3 certifications required from actuaries from Federal

Consequence of not submitting the 3 certifications

A

1) PROBABLE YIELD METHODOLOGY
- -cvg level must NOT exceed 90%
- -probable yield test must demonstrate that methodology do not result in over-insurance

2) PREMIUM RATE methodology
- -must be actuarially sound

3) SELF-SUSTAINABILITY of program
- -must include the S-S load

Consequence :
Federal govt may reduce its premium contribution to the province’s insurance program.

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11
Q

AGRICULTURAL PROGRAMS

OBJECTIVE of self-sustainability actuarial certification

A

To assess sustainability of program based on stochastic simulation of financial position over 25 yrs

Must be able to recover from severe loss scenarios within a reasonable period of time

similar to DCAT (analysis of base + adverse scenario) but over longer time horizon

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12
Q

AGRICULTURAL PROGRAMS

2 criteria for production insurance program to be considered self-sustainable

A
  • Recovery from 95th percentile deficit would occur, on average, within 15 years
  • Recovery from 95th percentile deficit would occur, with 80% probability, within 25 years.
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13
Q

AGRICULTURAL PROGRAMS

4 guidance on actuarial practices for
“Actuarial Certifications required by AAFC”

A

DATA RELIANCE
actuary to disclose reliance on others

DOCUMENTATION OF WORK
so that another actuary can reproduce the work

ACTUARIAL JUDGMENT
documented for areas where judgment is used

MATERIALITY
disclose materiality standard used

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14
Q

AGRICULTURAL PROGRAMS

3 types of YIELD-BASED programs

A

INDIVIDUAL
payment when individual’s production falls below production guarantee

COLLECTIVE
payment when collective production falls below collective production guarantee (regardless of individual’s production)

PROXY CROP COVERAGE
payment rate for a given crop is based on payment rate of another crop with more reliable production and price data

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15
Q

AGRICULTURAL PROGRAMS

2 types of NON-YIELD-BASED programs

A

WEATHER DERIVATIVE PLAN
payment when pre-determined meteo threshold is triggered, regardless of producer’s actual production. (eg. More than 5 days with consecutive rainfall)

ACRE-BASED COMPENSATION
payment when more than x% of all insured trees are destroyed by an insured peril

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16
Q

AGRICULTURAL PROGRAMS

4 adjustments to HISTORICAL PROBABLE YIELD to estimate the current probable yield

A

Adjustments for :
–QUALITY

–CHANGE IN DATA SOURCES OR DATA COLLECTION METHODOLOGIES

–CHANGE IN MIX OF INSUREDS OVER TIME

–CHANGE IN FARMING/MANAGEMENT PRACTICES

–CHANGE IN PROGRAM DESIGN

–TRENDS IN TECHNOLOGY

–MATURITY OF PERENNIAL PLANTS

17
Q

AGRICULTURAL PROGRAMS

4 adjustments to INDEMNITY RATES USED as a basis for premium rate methodology in Agricultural Programs

A

Adjustments for :
-PROBABLE YIELD METHODOLOGY

  • CURRENT PROGRAM CONDITIONS
  • TRENDS
  • QUALITY
  • CHANGE IN MIX OF INSUREDS
18
Q

AGRICULTURAL PROGRAMS

Credibility weighting is often used in probable yield and premium methodologies.

4 possible selections for a credibility complement of probable yield.

A
  • a larger group of data (regional, provincial)
  • a proxy
  • a model or simulation
  • a prior selection based on judgment
19
Q

AGRICULTURAL PROGRAMS

4 stabilizing-mitigating techniques used in PROBABLE YIELD METHODOLOGY

A

Long-term averaging

Capping YoY change in probable yield

CUSHIONING: smaller weights on historical yields outside a statistical measure around the mean.

SMOOTHING: floor and ceiling on historical yields outside a statistical measure around the mean.

20
Q

AGRICULTURAL PROGRAMS

PREMIUM RATES must be responsive but stable.

4 mitigating techniques to ensure stability of results.

A

Long-term averaging

Capping YoY change in indicated indemnity rates

Transition rule after introducing new methodology

Splitting indemnity rates into basic and excess rates : basic indemnity rates are more credible and stable, excess indemnity rates are more volatile, can be based on longer period

21
Q

AGRICULTURAL PROGRAMS

3 OPTIONAL BENEFITS that may be included in the insurance program.

A

QUALITY LOSS PROTECTION
protects from decrease in quality of production
STORAGE COVERAGE
protects for products lost in storage
HAIL SPOT LOSS COVERAGE
protects against hail
—
UNSEEDED ACREAGE BENEFITS
covers unseeded crops due to excessive moisture
ESTABLISHMENT BENEFITS
covers for crops that do not grow due to insurable causes
RESEEDING BENEFITS
covers for reseeding after damage occurring early-season
EMERGENCY WORK BENEFITS
covers mitigation costs following a damage
ABANDONMENT BENEFITS
covers abandoned crops severely damaged
WHOLE FARM OPTIONS
indemnities based on combined actual yield of group of crops
RISK-SPLITTING BENEFITS
indemnity based on subset of total farm production
FLOATING PRICE OPTIONS
insured price may vary with market price at harvest

22
Q

AGRICULTURAL PROGRAMS

In AgriInsurance, what would happen to the premium if the cvg level was to decrease?

A

If cvg level is lower, there is a lower chance that actual production falls below cvg level, hence premium should be lower.

Premium Rate = Premium / Liabilities
Liability = E(production value) * cvg level

If cvg level decrease, premium will decrease as well.

23
Q

AGRICULTURAL PROGRAMS

components that must be incorporated to arrive at a final premium rate for AgriInsurance.

A
  • Expected indemnity rate (ratio of indemnity/liability)
  • Discount/surcharges
  • Balance-back factor
  • Uncertainty margin
  • Self-sustainability load
  • Reinsurance load.
24
Q

AGRICULTURAL PROGRAMS

4 adverse scenarios that should be considered to assess self-sustainability of a production insurance program

A
  • Increase in liabilities
  • Decrease in liabilities
  • Adverse claims experience
  • Introduction of new major insurance plans
  • Reduction in investment returns
25
Q

AGRICULTURAL PROGRAMS

Uncertainty Margin purpose
Uncertainty Load

A

load in rates to account for limitation in data, assumption and methods

risk margin added to E(losses).
higher for :
-crops with sparse data
-important changes in program design 
-YoY loss volatility
26
Q

AGRICULTURAL PROGRAMS

Self-Sustainability Load purpose

A

load in rates to recover past deficits and maintain surplus, to account for volatility in loss experience

27
Q

AGRICULTURAL PROGRAMS

Reinsurance Load purpose

A

allocation of reinsurance costs in premium

28
Q

AGRICULTURAL PROGRAMS

Contrast
self-sustainability assessment of Agricultural Program
to
DCAT Analysis

A

both are analysis of financial condition under base and adverse scenarios

SELF-SUSTAINABILITY involves :
a fully stochastic analysis
a longer time horizon (25 years)

29
Q

AGRICULTURAL PROGRAMS

2 criteria an agricultural insurance program must meet to be considered SELF-SUSTAINABLE

A

1 - recover from the 95th percentile deficit, on average, within 15 years

2 - recover from the 95th percentile, with 80% probability, within 15 years.

30
Q

AGRICULTURAL PROGRAMS

2 responsibilities of the following in the Production Insurance Program :

Canada
Province
Producers
Private Insurer

A

Canada

1) pay portion of premium and admin costs
2) act as a reinsurer to provincial plans

Provinces

1) Determine appropriate premium
2) adjust losses

Producers

1) manage crop normally
2) pay a portion of premium

Private insurer

1) not involved in production insurance though they might act as reinsurer to provincial plan
2) provide some optional coverages such as spot-loss hail

31
Q

AGRICULTURAL PROGRAMS

Sources of funding and admin expenses
(PRODUCER / PROVINCIAL / FEDERAL) of 6 crop insurance programs

A

Funding : PRODUCER / PROVINCIAL / FEDERAL
Admin Exp : PRODUCER / PROVINCIAL / FEDERAL

Agri-Insurance
40 / 24 / 36
0 / 40 / 60
Agri-Stability
0 / 40 / 60
Agri-Invest
0 / 40 / 60
Agri-Recovery
0 / 40 / 60
Advance Payments Programs
0 / 0 / 100
Western Livestock Price Insurance Program
100 / 0 / 0
0 / 40 / 60
32
Q

AGRICULTURAL PROGRAMS

What is GF2 (Growing Forward 2)?

A

comprehensive federal-provincial-territorial framework for Canada’s agricultural sector

Exam 6C (Fall 2018) (53 decks)

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