Chev.Agric Flashcards
What is GF2 (Growing Forward 2)?
Comprehensive federal-provincial-territorial framework for Canada’s agricultural sector
What are the 6 BRM (Business Risk Management) programs in GF2?
- Agri-Insurance (protects against Production Loss)
- Agri-Stability (protects producers against decrease in their production income, can be due to increase in expenses, decrease in price or decrease in production)
- 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))
- Agri-Recovery (disaster recovery program which is assessed on a case by case basis)
- Advance Payments Program (low-interest loans for Cash Flow management)
- WLPIP - Western Livestock Price Insurance Program (protects against fluctuations in livestock market prices)
Identify purposes of the BRMs (Business Risk Management) in the GF2 other than the pure insurance purposes (6)
- 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 (Business Risk Management) programs funded?
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
Define probable yield
Represents the expected yield per unit of exposure for a given producer, agricultural product and crop year
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
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, methods and statistical volatility
Define self-sustainability load
A load in rates to recover deficits & maintain surplus level appropriate to sustain volatility in loss experience
What are the reasons for an uncertainty & self-sustainability load
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
Actuarial certification - what is the contents of such certification
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
Actuarial Certification - why is it required?
For federal funding
Actuarial Certification - how often is it required?
- Frequency is determined using a RISK-BASED approach
- At least every 5 years
Actuarial Certification - what triggers the requirement of a new certification (2)?
- Significant changes in program designs or methods
- New crops
Actuarial Certification - briefly describe the purpose of probable yield tests
To prevent over-insurance
Regulation - key elements of Canadian Agri-Insurance Regulation (4)
- 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)
Identify the main types of Agri-Insurance plans & provide examples of each
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
When does yield-based plans 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 from 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 meterological 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 tress are destroyed by an insured peril regardless of actual production
What is the formula for probable yield-based plan
Average of yearly production yields
Adjustments to historical yields - what is the purpose of such adjustments
To reflect current production capability (similar to on-levelling premium)
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)
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
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)
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 %
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
Formulas - yield based plans: indemnity $s
Indemn$ = MAX(0,PG-AP)*Insured unit price
where:
- PG = production guarantee
- AP = actual production
Non-yield based plan - types of weather events that are covered (3)
Excessive rainfall, drought, freeze
Non-yield based plan - identify variables that affect compensation in such plans (3)
Number of units affected, insured price, deductible
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)
Production insurance programs - Formula for Prem$
Prem$ = PremRt * L$ (note that PremRt varies by Covg%)
Production insurance programs - Formula for Indem$ (& IndemRt)
Indem$ = IndemRt * L$ (Note: first calculate Indem$ using above formula then calculate IndemRt then feed into PremRt)
Production insurance programs - what are the consequences of rate instability
Fluctuations in participation, adverse selection
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
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
Production insurance programs - how are NON-yield based plans priced?
Same as yield-based plans: IndemRt(UB(+/-)R*S)
- But possibly with extra considerations
Example: Weather-derivative plans may have extra considerations like temperature thresholds
Briefly describe two additional considerations that are required for pricing non-yield based plans as compared to pricing yield-based plans
- How to measure the amount of loss incurred
- How to determine whether event has occurred or not
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
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
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
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
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
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
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
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
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
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
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
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
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 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
Identify the roles & responsibilities of the provincial government in agri-insurance programs
- Determine probable yield, appropriate premium rate
- Responsible for claims handling process
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
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
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
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
Examples of areas where Actuarial Certifications are required (4)
- Agricultural Insurance Production Programs
- Risk Transfer analysis
- Valuation of reserves
- Rate Filings (certain aspects)
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
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
