Chev.Agric Flashcards
What is the Chev.Agric reading about?
It is about something called GF2 (Growing Forward 2)
What is GF2?
A comprehensive federal-provincial-territorial framework for Canada’s agricultural sector
What are the 6 BRM programs?
- Agricultural Insurance
- Agricultural Stability
- Agricultural Investment
- Agricultural Recovery
- Advanced Payments Program
- Western Livestock Price Insurance Program
What is the most important of the 6 BRM programs discussed in this paper?
Agricultural (Production) Insurance
Describe the agricultural insurance program and its funding.
Protects against production loss
Producer-provincial-federal partnership
Describe the agricultural stability program and its funding.
Protects against margin decline (decrease in yield)
Producer-provincial-federal partnership
Describe the agricultural investment program and its funding.
Investment fund for small losses
Producer-provincial-federal partnership
Describe the agricultural recovery program and its funding.
Protects against disaster
Provincial-federal partnership
Describe the Advance Payments Program and its funding.
Provides low-interest loans for cash flow management
Federal funding
Describe the Western Livestock Price Insurance Program and its funding.
Protects against fluctuation in livestock prices
Producer-provincial-federal partnership
Define probable yield
Expected yield per unit of exposure for a given producer, agricultural product and crop year.
Briefly describe 4 adjustments to historical probable yields to estimate the current probable yield.
- Changes in farming or management practices
- Changes in insurance program design
- Changes in technology
- Weather pattern trends
Define balance-back factor.
Factor applied to aggregate premium to correct for individual discounts & surcharges.
Define risk-splitting benefits.
Indemnity based on a subset of production for a given agricultural product.
Define reinsurance load.
Account for reinsurance costs when the province purchases reinsurance.
Define uncertainty load.
a load in rates to account for limitations in data, assumptions, methods.
Define self-sustainability load.
A load in rates to recover deficits & maintain surplus.
Briefly describe the purpose of probable yield tests.
To ensure there is no over-insurance.
Briefly explain the need for both an uncertainty margin and the self-sustainability load in pricing yield-based plans.
Both are necessary to ensure the program is self‐sustainable.
Uncertainty covers future contingencies.
Self-sustainability recovers past deficit.
What is the content of an Actuarial Certification? (3)
The Actuarial Certification should provide an opinion on:
|1] METHOD for calculating probable yield (for deriving exposure for yield-based plans)
|2] METHOD for pricing
|3] SELF-SUSTAINABILITY of program
Why is the Actuarial Certification required?
For federal funding
How often is the Actuarial Certification required?
Frequency is determined using a risk-based approach.
At least every 5 yrs
Identify 2 causes that trigger the requirement of a new Actuarial Certification.
- Significant changes in program design or methods
- New crops
Identify 4 key elements of the Canadian Agri-Insurance Regulation.
- The maximum coverage is 90% of the probable yield.
- Minimum of 10% deductible
- Rates must be actuarially sound.
- Must include actuarial certifications set by AAFC.
What are the 2 different types of Agri-Insurance plans?
- Yield-based: can be individual or collective
2: Non-yield-based: examples are weather derivative, acre-based, mortality for livestock
What is a yield-based plan?
A plan where the indemnity payment is based on the actual yield versus the insured yield.
How do non-yield-based plans work?
For this type of production insurance, coverage triggers are NOT based on yield.
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 the coverage trigger for a non-yield based, weather derivative plan?
TRIGGER: when pre-determined meteorological thresholds are breached REGARDLESS of actual production.
What is the coverage trigger for a non-yield based, tree mortality plan?
TRIGGER: 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?
(just say it in words)
Average of yearly production yields
Define the purpose of adjustments to historical yields.
To reflect current production capability (similar to on-leveling premiums)
Identify 3 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 perennials (yield would vary over their life cycle)
- quality variation of crop from year-to-year (due to insured perils or other cause)
What actuarial inputs (2) is required regarding adjustments to historical yields (i.e. Actuarial Certification)?
REVIEW: trends
DISCLOSE: reliance on agricultural experts for other adjustments
Identify 4 stabilizing methods for probable yileds.
- Use a long-term average of historical yields (15-25yrs)
- Cap data to limit year-over-year changes
- Split basic & excess coverage since excess coverage is more volatile
- Give data outliers smaller weights when averaging (to cushion their effect)
- Apply floors/ceilings to data points (to smooth the effect of outliers)
- Use transition rules after introducing a new yield method (to smooth the transition)
How do you calculate the Production Guarantee?
PG = A x P x C
A is the insured area
P is the probable yield per unit of area
C is the coverage level %
How do you calculate the Indemnity (in dollars)?
Indem$ = Max(0, PG - AP)x(insured unit price)
AP is the Actual production
How do you calculate the Liability (in dollars) for yield-based plans?
L$(yield-based) = PG x insured price
How do you calculate the Liability (in dollars) for non-yield-based plans?
L$(non-yield-based) = (# insured units) x (insured price)
How do you calculate the Indemnity Rate?
IndemRt = Indem$ / L$
How do you calculate the Premium Rate?
(6 elements)
Indemnity Rate and add the following:
1. Uncertainty Margin
2. Balance-back factor
3. Individual discount/surcharge
4. Reinsurance load
5. Self-sustainability load
How do you calculate the Premium (in dollars)?
Prem$ = PremRt x L$
What are the 3 types of weather events that are covered by non-yield-based plans?
- Excessive rainfall
- Drought
- Freeze
Identify 3 variables that affect compensation in non-yield-based plans.
- # units affected
- Insured price
- Deductible
What are the 2 consequences of rate instability in production insurance programs?
- Fluctuations in participation
- Adverse selection
What is the effect of severe loss years on rates for production insurance programs?
Indem$ UP
–> ( IndemRt UP & SS load UP (to replenish surplus) )
–> PremRt UP
–> Prem$ UP
How are NON-yield-based plans priced?
- same as yield-based plans (IRt(UB+/-RS)
but possibly with extra considerations - EXAMPLE: weather-derivative plans may have extra considerations like temperature thresholds
Identify 2 pricing considerations for weather derivative plans.
- DATA: long-term history of meteorological data (vs producer data)
- EFFECTS: how weather affects production losses
What is the federal requirement for self-sustainability (statistical definition)?
for all base & adverse scenarios:
• 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, or
→ within 25 years with 80% probability
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 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?
The indemnity component
Because the probable 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 2 adverse scenarios relevant to self-sustainability in agri-insurance.
- Increase in liabilities (increases maximum exposure)
- Decrease in liabilities
- Adverse claims experience
- Introduction of a new insurance plan
- Deterioration in market value of investments
Provide 1 similarity and 2 differences between the assessment of agricultural self-sustainability and DCAT analysis.
SIMILARITY:
Both test plausible adverse scenarios to determine impact on financial condition.
DIFFERENCES:
• Fully stochastic for self-sustainability
• Longer time horizon for self-sustainability
True or False?
Government reinsurance for agri-insurance is considered traditional reinsurance.
False, it’s an optional deficit-financing scheme
Province may finance deficits as they occur VERSUS regularly contributing to a govt reinsurance fund
Describe the funding mechanism of 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 indemnities net of private insurance are paid out of production insurance fund first
Briefly describe 2 roles of the federal government in agri-insurance programs.
- Pay a portion of premium
- Act as a reinsurer to provincial plans.
Briefly describe 2 roles of the provincial government in agri-insurance programs.
- Determine premium rates
- Responsible for claims handling process
- Determine probable yield
Briefly describe 2 roles of the Canadian producers in agri-insurance programs.
- Manage crop normally
- Pay a portion of premium
Briefly describe 2 roles of the private insurance/reinsurance companies in agri-insurance programs.
- Provide coverage for perils not covered under gov insurance (ex: fire)
- Act as reinsurers to the program
Briefly describe 3 criteria used to evaluate government insurance programs.
- Whether it’s social welfare / insurance program
- Whether it’s efficient or accepted by the public
- Whether it’s necessary or serves social purpose
How do you calculate probable yield when there are missing years of data?
probable yield = avg (production yield over all years)
- but FILL IN missing years with: (Provincial Avg x index)
- where INDEX = avg ( Production Yld / Provincial Yld ) USING yrs for which producer data is available
