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Exam 6C - Fall 2023 > Chev.Agric > Flashcards

Chev.Agric Flashcards

1
Q

What is GF2 (Growing Forward 2)?

A

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

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2
Q

What are the 6 BRM (Business Risk Management) programs in GF2?

A
  1. Agri-Insurance (protects against Production Loss)
  2. Agri-Stability (protects producers against decrease in their production income, can be due to increase in expenses, decrease in price or decrease in production)
  3. Agri-Investment (encourages producers to save money. Government will make the same deposit as they do in the account for the first 1% (max 15K))
  4. Agri-Recovery (disaster recovery program which is assessed on a case by case basis)
  5. Advance Payments Program (low-interest loans for Cash Flow management)
  6. WLPIP - Western Livestock Price Insurance Program (protects against fluctuations in livestock market prices)
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3
Q

Identify purposes of the BRMs (Business Risk Management) in the GF2 other than the pure insurance purposes (6)

A
  • 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
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4
Q

How are the BRMs (Business Risk Management) programs funded?

A

BRM 1,2,3,6 (Agri-Insurance, Agri-Stability, Agri-Investment, WLPIP): funded by producer-provincial-federal

BRM 4 (Agri-Recovery) : funded by provincial-federal

BRM 5 (Advance Payment Program): funded by federal

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5
Q

Define probable yield

A

Represents the expected yield per unit of exposure for a given producer, agricultural product and crop year

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6
Q

Define balance-back factor

A

Factor applied to aggregate premium to correct for individual discounts & surcharges

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7
Q

Define risk-splitting benefits

A

Indemnity based on a subset of production (for a given agricultural product)

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8
Q

Define reinsurance load

A

Load to account for reinsurance costs when the province purchases reinsurance

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9
Q

Define uncertainty load (or risk margin)

A

A load in rates to account for limitations in data, assumptions, methods and statistical volatility

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10
Q

Define self-sustainability load

A

A load in rates to recover deficits & maintain surplus level appropriate to sustain volatility in loss experience

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11
Q

What are the reasons for an uncertainty & self-sustainability load

A

Both are necessary to ensure the program is self-sustainable. Uncertainty creates conservative estimates accounting for the future and the self-sustainability load recovers historical deficits

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12
Q

Actuarial certification - what is the contents of such certification

A

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

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13
Q

Actuarial Certification - why is it required?

A

For federal funding

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14
Q

Actuarial Certification - how often is it required?

A
  • Frequency is determined using a RISK-BASED approach
  • At least every 5 years
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15
Q

Actuarial Certification - what triggers the requirement of a new certification (2)?

A
  • Significant changes in program designs or methods
  • New crops
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16
Q

Actuarial Certification - briefly describe the purpose of probable yield tests

A

To prevent over-insurance

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17
Q

Regulation - key elements of Canadian Agri-Insurance Regulation (4)

A
  • Minimum deductible of 10%
  • Probable yield must reflect DEMONSTRATED production capabilities (to prevent over insurance)
  • rates must be ACTUARIALLY SOUND (include self-sustainability load + relevant costs)
  • Actuarial Certification is required set by AAFC (if uncertified, then federal government may reduce premium contribution to province)
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18
Q

Identify the main types of Agri-Insurance plans & provide examples of each

A

Yield based plan
- Individual: insured production is insured on their own production of the year according to contract
- Collective: Farmers are reimbursed based on production of all insured of an area compared to a historical average. Own production is irrelevant

Non-yield based plan
- weather derivative: based on a weather event (ex: drought)
- Acre-based: have a field protected against adverse event based on size. For example fire.
- Mortality for livestock: based on probability of death from an insured peril. Hog mortality for example

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19
Q

When does yield-based plans pay?

A

Pays when: Individual OR collective production < production guarantee for a specified agricultural product

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20
Q

Define proxy crop coverage

A

When payment rate for a given crop is based on payment rate from another crop with more reliable production/price data

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21
Q

What is the coverage trigger for a non-yield based, weather derivative plan

A

TRIGGER: when pre-determined meterological thresholds are breached regardless of actual production

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22
Q

What is the coverage trigger for a non-yield based, tree mortality plan

A

TRIGGER: when more than a certain % of tress are destroyed by an insured peril regardless of actual production

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23
Q

What is the formula for probable yield-based plan

A

Average of yearly production yields

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24
Q

Adjustments to historical yields - what is the purpose of such adjustments

A

To reflect current production capability (similar to on-levelling premium)

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25
Adjustments to historical yields - what are the triggers for making such adjustments (5) Exam question: briefly describe four adjustments to historical probably yields to estimate the current 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 over their life cycle) - Quality variation of crop from year-to-year (due to insured perils or other cause)
26
Adjustments to historical yields - what actuarial input is required regarding these adjustments (i.e. Actuarial Certification)
REVIEW: trends DISCLOSE: reliance on agricultural experts for other adjustments
27
Stabilizing methods for probable yields - identify the stabilizing methods (6)
Average: - Use a long-term average of historical yields (15-25 yrs) Cap: - Cap data to limit year-over-year changes in probably yield Split: - Split basic & excess coverage since excess coverage is more volatile Cushion: - Give data outliers smaller weights when averaging (to cushion their effect & avoid distortions) Smooth: - Apply floors/ceilings to data points (to smooth the effect of outliers) Transition (rules): - Use transition rules after introducing a new yield method (to smooth the transition)
28
Formulas - yield based plans: (PG,L) or Production Guarantee, Liability
PG = A * P * C L$ = A * P * C * Insured unit price where: - A = insured area - P = probable yield per unit of area - C = coverage level %
29
Formulas - non-yield based plans: (PG,L) or Production Guarantee, Liability
PG formula is not applicable since there is NO production guarantee for non-yield based plans L$ = # insured units * insured unit price
30
Formulas - yield based plans: indemnity $s
Indemn$ = MAX(0,PG-AP)*Insured unit price where: - PG = production guarantee - AP = actual production
31
Non-yield based plan - types of weather events that are covered (3)
Excessive rainfall, drought, freeze
32
Non-yield based plan - identify variables that affect compensation in such plans (3)
Number of units affected, insured price, deductible
33
Production insurance programs - what are included/excluded in rate calculations for production insurance programs
Expected losses only (admin costs are shared between federal & provincial govt)
34
Production insurance programs - Formula for Prem$
Prem$ = PremRt * L$ (note that PremRt varies by Covg%)
35
Production insurance programs - Formula for Indem$ (& IndemRt)
Indem$ = IndemRt * L$ (Note: first calculate Indem$ using above formula then calculate IndemRt then feed into PremRt)
36
Production insurance programs - what are the consequences of rate instability
Fluctuations in participation, adverse selection
37
Production insurance programs - what load factors must be incorporated to arrive at the final PremRt
To get Premium Rate, start with Indemnity rate then incorporate: - Uncertainty margin - Balance-back factors - Individual discount/surcharge - Reinsurance load - Self-sustainabiliy load
38
Production insurance programs - what is the effect of severe loss yrs on rates
Indem$ goes UP - Leads to increase of IndemRt & increase of Self-Sustainability load (to replenish surplus) - PremRt increases - Prem$ increases
39
Production insurance programs - how are NON-yield based plans priced?
Same as yield-based plans: IndemRt*(U*B*(+/-)*R*S) - But possibly with extra considerations Example: Weather-derivative plans may have extra considerations like temperature thresholds
40
Briefly describe two additional considerations that are required for pricing non-yield based plans as compared to pricing yield-based plans
1. How to measure the amount of loss incurred 2. How to determine whether event has occurred or not
41
Production insurance programs - identify pricing considerations for weather derivative plans (2)
Consideration 1 - DATA: long-term history of meterological data vs producer data Consideration 2 - EFFECTS: how weather affects production losses
42
Production insurance programs - Identify the cost-share levels (refers to sharing of premium contributions)
There are 3 cost-sharing levels depending on the severity of the loss: 1. Comprehensive (lowest cost level): 0%-80% in the overall loss distribution 2. High (middle cost level): 80%-93% in the overall loss distribution 3. Catastrophic (highest cost level): 93%-100% in the overall loss distribution
43
Production insurance programs - identify how are costs (premiums) shared between: producer, provincial & federal governments
Costs are shared between the producer, province & federal government according to loss level: - Comprehensive cost level - producer, province & federal government share costs - High cost level - producer, province & federal government share costs - Catastrophic cost level - provincial & federal government ONLY Note: admin expenses are shared by provincial & federal govt only
44
What is the federal requirement for self-sustainability (statistical definition)?
For all base & adverse scenarios: - Calculate the 95th percentile deficit 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
45
What is the 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
46
What is the basis for the self-sustainability test? (Length of the financial position projection)
Test basis: 25-yr fully stochastic simulation of financial position
47
What is the source of volatility in stochastic simulations of self-sustainability?
- Mainly the indemnity component - Because the probable yield & premium rate methodologies are designed to avoid large year-to-year variations
48
What is the actuary's role regarding the self-sustainability test?
The actuary should design or confirm the methodology for calculating the self-sustainability load
49
Actuary - identify adverse scenarios relevant to self-sustainability in agri-insurance (6)
- Increase in liabilities (increases maximum 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 new insurance plan - Deterioration in market value of investments - Combination of the above scenarios
50
Test - compare agricultural self-sustainability to FCT (Similarity, Difference)
Similarity: both consider base & adverse scenarios Differences: agricultural self-sustainability uses a fully stochastic simulation over a longer time horizon
51
Is Govt reinsurance for agri-insurance considered traditional reinsurance?
No, it's an optional deficit-financing scheme - Province may finance deficits as they occur versus regularly contributing to a govt reinsurance fund
52
Describe the funding mechanism for govt 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 years
53
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
54
Identify the roles & responsibilities of the federal government in agri-insurance programs
- Pay a portion of premium & administrative costs - Approve the provincial programs to ensure consistency
55
Identify the roles & responsibilities of the provincial government in agri-insurance programs
- Determine probable yield, appropriate premium rate - Responsible for claims handling process
56
Identify the roles & responsibilities of producers in agri-insurance programs
- Pay their share of the premium - Manage their crop adequately, and as per any requirement of their insurance policy
57
Identify the roles & reponsibilities of private insurance in agri-insurance programs
Private insurance: provides coverage for producer for perils not covered under government insurance (ex: spot-loss hail coverages to produces) Reinsurance: provides reinsurance for government insurance
58
Evaluate the government agricultural insurance program using the criteria from the Government Insurer's study note
Welfare or insurance? - Insurance because producers pay premiums and government pays covered losses Efficient? - Yes, because government uses existing infrastructure and doesn't make a profit Necessary? - Yes because farmers rely on the income stability the government program provides
59
Compare the different triggers for: (1) Actuarial Certification (2) Historical Adjustments to Probable Yield (3) 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
60
Examples of areas where Actuarial Certifications are required (4)
- Agricultural Insurance Production Programs - Risk Transfer analysis - Valuation of reserves - Rate Filings (certain aspects)
61
Examples of areas where Transition rules are used (2)
Agricultural 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
62
Examples of areas where stochastic models are used
Agricultual Insurance (fully stochastic simulations are used) - for adverse scenarios in self-sustainability model FCT scenarios - when risk distribution is easily inferred MfADs - where the cost distribution is skewed, and deterministic methods may not work well

Exam 6C - Fall 2023 (56 decks)

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