Chev.Agric Flashcards

Question

Actuarial Certification - why is it required

Answer 1

for federal funding

Answer 2

- frequency is determined using a RISK-BASED approach - at least every 5 yrs

Answer 3

- significant changes in program design or methods - new crops

Answer 4

to prevent over-insurance

Answer 5

- 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)

Answer 6

1. yield-based: can be individual or collective 2. non-yield-based: examples are weather derivative, acre-based, mortality for livestock

Answer 7

a plan where the indemnity payment is based on the actual yield versus the insured yield

Answer 8

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.)

Answer 9

yield-based or non-yield-based production insurance plan

Answer 10

1. calculate the average production yield - also called "probable yield" 2. adjusting historical probable yield 3. 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 % 4. 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$

Answer 11

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

Answer 12

PG = APC L$ = APC x (insured unit price) where A = insured Area P = Probable yield per unit of area C = coverage level %

Answer 13

Indem$ = MAX(0, PG - AP) x (insured unit price) where PG = Production Guarantee AP = Actual Production

Answer 14

PG formula is not applicable since there is NO production guarantee for non-yield-based plans L$ = (# insured units) x (insured unit price)

Answer 15

excessive rainfall, drought, freeze

Answer 16

units affected, insured price, deductible

Answer 17

expected losses only (administrative costs are shared between federal & provincial govt)

Answer 18

fluctuations in participation, adverse selection

Answer 19

to get PREMIUM RATE, start with INDEMNITY RATE then incorporate: - uncertainty margin - balance-back factors - individual discount/surcharge - reinsurance load - self-sustainability load

Answer 20

Indem$ UP --> ( IndemRt UP & SS load UP (to replenish surplus) ) --> PremRt UP --> Prem$ UP

Answer 21

- same as yld-based plans (IRt(UB+/-RS) but possibly with extra considerations - EXAMPLE: weather-derivative plans may have extra considerations like temperature thresholds

Answer 22

CONSIDERATION 1 - DATA: long-term history of meteorological data (vs producer data) CONSIDERATION 2 - EFFECTS: how weather affects production losses

Answer 23

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

Answer 24

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)

Answer 25

* 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)

Answer 26

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.

Answer 27

design or confirm the methodology used for calculating the self-sustainability load.

Answer 28

* 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

Answer 29

Similarity: both consider (base, adverse) scenarios Difference: Agri self-sustainability uses a fully stochastic simulation over a longer time horizon

Answer 30

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

Answer 31

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

Answer 32

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

Answer 33

TEST BASIS: 25-yr stochastic simulation of financial position

Answer 34

- mainly the indemnity component - because the (probable yield & premium rate) methodologies are designed to avoid large year-to-year variations

Answer 35

- no, it's an optional deficit-financing scheme - province may finance deficits as they occur VERSUS regularly contributing to a govt reinsurance fund

Answer 36

- when SURPLUS of the production insurance fund is DEPLETED - note that indemnities net of private insurance are paid out of production insurance fund first

Answer 37

- develop guidelines for production insurance programs - provide financing mechanism when programs are in deficit position

Answer 38

- determine (probable yield, premium rate) - manage claims

Answer 39

- pay their share of the premium - report yields

Answer 40

PRIVATE INSURANCE: provides coverage (for producer) for perils not covered under govt insurance (Ex: fire) REINSURANCE: provides reinsurance for Govt INSURANCE

Answer 41

*significant changes in program design or methods *new crops

Answer 42

* 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)

Answer 43

* inception of contract * when a change to the existing contract significantly alters expected future cash flows

Answer 44

* Agricultural Insurance Production Programs * Risk Transfer Analysis * Valuation of Reserves * Rate Filings (certain aspects)

Answer 45

* 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

Answer 46

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

Answer 47

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