Chev.Agri Flashcards
what is GF2 (Growing Forward 2)?
- a comprehensive federal - provincial -territorial framework for Canada’s agricultural sector
what are the 6 BRMs (business risk management) programs in GF2?
agri I - SIR
- agri Insurance: protects against protection 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
identify purposes of the BRMs in GF2 other than the pure insurance purposes
- ensure availability and affordability of agricultural 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
identify purposes of the BRMs in GF2 for pure insurance purposes
- protect producers from loss of production
- protect producers when there is a decline in market prices, leading to a reduction in income
- build an individual investment fund to mitigate small income losses
- protect producers against natural disaster
- provide loans to producers with low interest rate
- protect against decrease in livestock value
how are the BRMs programs funded?
- BRM1236 (WLPIP): funded by producer-provincial federal
- BRM4: funded by provincial-federal
- BRM5: funded by federal
define probable yield
expected yield of an agricultural product, measures coverage in yield based plans
define balance back factor
factor applied to aggregate premium to correct for individual discounts and surcharges
define risk splitting benefits
indemnity based on a subset of production for a given agricultural product
define reinsurance load
to account for reinsurance costs when the province purchases reinsurance
define uncertainty load or risk margin
a load in rates to account for limitations in data, assumptions and methods
define self sustainability load
a load in rates to recover deficits and main surplus
reason for uncertainty and self sustainability load
uncertainty load: covers future contingencies
self sustainability load: recover past deficits
what is the content for an actuarial certification
provide opinion on
- method for calculating probable yield
- method for pricing
- self 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 are the 2 triggers the requirement of a new certification?
- significant changes in program design or methods
- new crops
describe the purpose of probable yield tests
to prevent over insurance
4 key elements of Canadian agri insurance regulation
- minimum deductible = 10%
- probable yields must reflect demonstrated production capabilities to prevent over insurance
- rates must be actuarially sound
- actuarial certification required
identify the main types of agri insurance plans and provide examples of each
- yield based plan: individual or collective
- non yield based plan: weather derivative, acre based, mortality of 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 and price data
what is the coverage trigger for a non yield based, weather derivative plan?
when pre determined meteorological thresholds are breached regardless of actual production
what is the 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 (similar to on levelling premiums)
what are the triggers of adjusting historical yields?
- a change in farming and management practices
- a change in insurance program design
- a change in data source or data collection technique
- maturity of perennials
- quality variation of crop from year to year
what actuarial input is required regarding adjusting historical yields?
- review trends
- disclose reliance on agricultural experts for other adjustments
stabilizing methods for probable yields methods
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 and excess coverage since excess coverage is more volatile
- Cushion: give data outliers smaller weights when averaging to cushion their effect
- Smooth: apply floors and ceilings to data points to smooth the effect of outliers
- Transition: use transition rules after introducing a new yield method
yield based plans Production Guarantee and Liability formulas
PG = APC
L = APC*insured unit price
A = insured area
P = probable yield per unit are
C = coverage level %
non yield based plans Production Guarantee and Liability formulas
PG formula is not applicable since there is no production guarantee for non yield based plans
L = number of insured units * insured unit price
formulas for indemnity $ for yield based plan
indem = max (0,PG-AP) *insured unit price
F2014Q12
types of weather events that are covered under non yield based plan
- excessive rainfall
- drought
- freeze
identify variables that affect compensation in non yield based plans
- number of units affected
- insured price
- deductible
what are included and excluded in rate calculations for production insurance program?
expected losses only
administrative costs are share between federal and provincial government
production insurance program
formula for premium
prem = premium rate * loss amount
premium rate varies by coverage %
production insurance program
formula for indemnity amount and rate
indemnity amount = indemnity rate * loss amount
first calculate indemnity amount, then calculate indemnity rate, then feed into premium rate
what are the consequences of rate instability?
- fluctuations in participation
- adverse selection
what load factors must be incorporated to arrive at the final premium rate in production insurance programs?
to get premium rate, start with indemnity rate then incorporate
- uncertainty margin
- balance back factors
- individual discount / surcharge
- reinsurance load
- self sustainability load
what is the effect of severe loss years on rates?
indemnity goes up.
indemnity rate and ss load to replenish surplus goes up
premium rate goes up
premium goes up
how are non yield based plans priced?
- same as yield based plans but with extra considerations
- ex: weather derivative plans may have extra considerations like temperature thresholds
identify pricing consideration for weather derivative plans
- data: long term history of meteorological
气象 data vs producer data
identify cost share levels (refer to sharing of premium contributions)
3 cost sharing levels depending on severity of loss
- comprehensive: 0-80% in the overall loss distribution
- high: 80-93%
- CATL 93-100%
identify how are costs (premiums) shared between producer/provincial/federal governments
shared according to loss level
- comprehensive: ppf share costs
- high: ppf share costs
- cat: provincial and federal only
note that administrative expenses are shared by provincial and federal government only
what is the federal requirement for self sustainability?
for all base & adverse scenarios:
- calc 95% 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
- within 25 years with 80% probablity
what is the basis for the self sustainability load selection?
selected target surplus level, can be expressed in different ways
- $ value
- % of liability dollars
- multiple of premiums
- percentile over a given time horizon
what is the source of volatility in stochastic simulations of self sustainability?
mainly the indemnity component
because the probable yield and premium rate methodologies are designed to avoid large year to year variations
what is the basis for the self sustainability test
25 year stochastic simulation of financial position
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
- adverse claims experience
- introduction of new insurance plan
- deterioration in market value of investments
- combination of above
what are the similarities and differences between agricultural self sustainability and DCAT
Similarity:
- both consider base and adverse scenarios
- both are forward looking to get expectation of financials in the future
Diff:
- agri self sustainability uses a fully stochastic simulation over a longer time horizon
is government reinsurance 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 agricultural insurance
- provincial producer programs contribute a % of premium to provincial and federal reinsurance
- amount is based on surplus position and risk profile
- must self sustain for 25 years
what triggers government reinsurance for an agri insurance program?
- when surplus of the production insurance fund is depleted
- note that indemnities net of private insurance are paid out of production insurance fund first
identify roles and responsibilities of the federal government in agri insurance programs
- develop guidelines for production insurance program
- provide financing mechanism when programs are in deficit position
identify roles and responsibilities of the provincial government in agri insurance programs
- determine probable yields, premium rates
- manage claims
identify roles and responsibilities of the producers in agri insurance programs
- pay their share of the premium
- report yields
identify roles and responsibilities of the private insurance and reinsurance in agricultural insurance program
- private insurance: provides coverage for producer for perils not covered under government insurance (ex: fire)
- reins: provides reinsurance for govt insurance
evaluate the government agricultural insurance program using the criteria from the government insurer study note
1) welfare or insurance?
- insurance because producer pay premiums and government pay covered losses
2) efficient?
- yes because government uses existing infrastructure and doesn’t make a profit
3) necessary?
- yes, because farmers rely on the income stability the government program provides
compare the different triggers for
1) actuarial certification
2) historical adjustment to probable yield
3) risk transfer test
1)
- significant changes in program design or methods
- new crops
2)
- a change in farming or management practices
- a change in insurance program design
- a change in data source or data collection technique
- maturity in perennials
- quality variation of crop from year to year
3)
- inception of contract
- when contract changes 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
agri insurance - probable yield calculation:
- after a new methodology is introduced
- use transition rules or stabilizing methods to prevent sudden large changes
rating:
- prevents individual policyholders from getting a big rate change all at once
examples of areas where stochastic models are used
- agri: for adverse scenarios in self sustainability mode
- DCAT: when risk distribution is earsily inferred
- mfad: where the cost distribution is skewed, and deterministic methods may not work well
