Chev.Agric Flashcards
what is GF2 (Growing Forward 2)
comprehensive (federal-provincial-territorial) framework for (Canada’s agricultural sector)
what are the BRMs (Business Risk Management) programs in GF2 (6)
1) Agri-Insurance (protects against Production Loss)
2) Agri-Stability (protects against Margin Decline)
3) Agri-Investment (Investment Fund for small losses)
4) Agri-Recovery (protects against Disaster)
5) Advance Payments Program (low-interest loans for Cash Flow management)
6) WLPIP - Western Livestock Price Insurance Program (protects against flucutuations in livestock prices)
identify purposes of the BRMs in 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 (5):
FUNDED BY (federal)
probable yield
expected yield of an agricultural product (measures coverage in yield-based plans)
balance-back factor
(factor applied to aggregate premium) to correct for (individual discounts & surcharges)
risk-splitting benefits
indemnity based on a subset of production (for a given agricultural product)
reinsurance load
to account for reinsurance costs when the province purchases reinsurance
uncertainty load (or risk margin)
a load in rates to account for limitations in (data, assumptions, methods)
self-sustainability load
a load in rates to recover deficits & maintain surplus
reason for (uncertainty, self-sustainability) load
uncertainty load: covers future contingencies
self-sustainability load: recovers past deficits
Actuarial Certification - what is the content 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
what is GF2 (Growing Forward 2)
comprehensive (federal-provincial-territorial) framework for (Canada’s agricultural sector)
identify purposes of the BRMs in GF2 other than the pure insurance purposes (6)
The examiners’ report accepted the pure insurance functions AND these:
* 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 (5): FUNDED BY (federal)
probable yield
expected yield of an agricultural product (measures coverage in yield-based plans)
balance-back factor
(factor applied to aggregate premium) to correct for (individual discounts & surcharges)
risk-splitting benefits
indemnity based on a subset of production (for a given agricultural product)
reinsurance load
to account for reinsurance costs when the province purchases reinsurance
uncertainty load (or risk margin)
a load in rates to account for limitations in (data, assumptions, methods)
self-sustainability load
a load in rates to recover deficits & maintain surplus
reason for (uncertainty, self-sustainability) load
uncertainty load: covers future contingencies
self-sustainability load: recovers past deficits
Actuarial Certification - what is the content 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 yrs
Actuarial Certification - what triggers the requirement of a new certification (2)
- significant changes in program design 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 = 10%
- probable yields must reflect DEMONSTRATED production capabilities (to prevent over-insurance)
- rates must be ACTUARIALLY SOUND (include self-sustainability load + relevant costs)
- Actuarial Certification is required (if uncertified, then federal govt may reduce premium contributions to province)
what are the different types of Agri-Insurance plans?
- yield-based: can be individual or collective
- 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.
Eg: A weather derivative plan is triggered when a pre-determined meteorological threshold is breached REGARDLESS of actual yield. (This might be rainfall that exceeded a specific amount.)
Types of production insurance
yield-based or non-yield-based production insurance plan
steps of pricing a yield-based production insurance plan
- calculate the average production yield - also called “probable yield”
- adjusting historical probable yield
- Basic Formulas :
(yield) PG = A x P x C
Indem$ =MAX ( 0, PG - AP ) x (insured unit price) = IndemRt x L$
where
A = insured Area
P = Probable yield per unit of area
C = coverage level % - Yield & Non-yield formulas:
L$ (yield-based plans) =PG x (insured price)
L$ (non-yield-based plans) =(# of insured units) x (insured price)
Indem$ = IndemRt x L$
Prem$ = PremRt x L$
what load factors must be incorporated to arrive at the final PremRt
to get PREMIUM RATE, start with INDEMNITY RATE then incorporate: (UB+/-RS)
- uncertainty margin
- balance-back factors
- individual discount/surcharge
- reinsurance load
- self-sustainability load
formulas - yield-based plans: (PG, L) or Production Guarantee & Liability
PG = APC
L$ = APC x (insured unit price)
where
A = insured Area
P = Probable yield per unit of area
C = coverage level %
yield-based plan - formulas: indemnity $s
Indem$ = MAX(0, PG - AP) x (insured unit price)
where
PG = Production Guarantee
AP = Actual Production
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) x (insured unit price)
non-yld-based plan - types of weather events that are covered (3)
excessive rainfall, drought, freeze
non-yld-based plan - identify variables that affect compensation in such plans (3)
units affected, insured price, deductible
production insurance programs - what are included/excluded in rate calculations for production insurance programs
expected losses only (administrative costs are shared between federal & provincial govt)
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-sustainability load
production insurance programs - what is the effect of severe loss yrs on rates
Indem$ UP
–> ( IndemRt UP & SS load UP (to replenish surplus) )
–> PremRt UP
–> Prem$ UP
production insurance programs - how are NON-yield-based plans priced
- same as yld-based plans (IRt(UB+/-RS)
but possibly with extra considerations - EXAMPLE: weather-derivative plans may have extra considerations like temperature thresholds
Production insurance programs - identify pricing considerations for weather derivative plans (2)
CONSIDERATION 1 - DATA: long-term history of meteorological 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 overal loss distribution
[2] High (middle cost level): (80% - 93% in the overal 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:
[1] Comprehensive cost level → producer, province, and federal government share costs
[2] High cost level → producer, province, and federal government share costs
[3] Catastrophic cost level → provincial & federal government only
(Note that administrative expenses are shared by provincial & federal government only)
how is self-sustainability defined?
- Conceptual defn: RECOVER from severe loss scenarios WITHIN a reasonable time
- Statistical defn: FOR ALL (base, adverse) scenarios with INITIAL DEFICIT = 6th yr, 95th percentile: MUST RECOVER DEFICIT IN (15yrs on avg AND 25yrs with 80% probability)
how can we design a self-sustainable program
The basis for a self-sustainability test is a 25-year stochastic simulation of financial position. Without getting into the details of how this simulation is designed, just note that the simulation should take into account various adverse scenarios.
What is the actuary’s role regarding self-sustainability
design or confirm the methodology used for calculating the self-sustainability load.
actuary - identify adverse scenarios relevant to self-sustainability in agri-insurance
- 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 a new insurance plan
- deterioration in market value of investments
- combination of the above scenarios
how does the self-sustainability test (6th yr, 95th percentile) compare to DCAT?
Similarity: both consider (base, adverse) scenarios
Difference: Agri self-sustainability uses a fully stochastic simulation over a longer time horizon
what is the role of government and other players in agricultural insurance
Govt agency provide federal-provincial programs. support the traditional system of private insurance between an insurer and producer/insured. Private insurers may provide coverage for perils (like fire) not covered by normal production insurance. Private insurers may also offer reinsurance
what is the federal requirement for self-sustainability (statistical defn)
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, 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
TEST BASIS: 25-yr 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
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
what triggers govt 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 govt in agri-insurance programs
- develop guidelines for production insurance programs
- provide financing mechanism when programs are in deficit position
identify the roles & responsibilities of the PROVINCIAL govt in agri-insurance programs
- determine (probable yield, premium rate)
- manage claims
identify the roles & responsibilities of the PRODUCERS in agri-insurance programs
- pay their share of the premium
- report yields
identify the roles & responsibilities of the PRIVATE INSURANCE & reinsurance in agri-insurance programs
PRIVATE INSURANCE: provides coverage (for producer) for perils not covered under govt insurance (Ex: fire)
REINSURANCE: provides reinsurance for Govt INSURANCE
Trigger for Actuarial Certification:
*significant changes in program design or methods
*new crops
Trigger for 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 over their life cycle)
- quality variation of crop from year-to-year (due to insured perils or other cause)
Trigger for Risk Transfer Test:
- inception of contract
- when a change to the existing contract 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
Agricultural Insurance
- for adverse scenarios in self-sustainability model
DCAT scenarios
- when risk distribution is easily inferred
MfADs
- where the cost distribution is skewed, and deterministic methods may not work well
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
