Chevalier - Agricultural Risk Programs Flashcards
What is Growing Forward 2?
A comprehensive federal-provincial-territorial framework for Canada’s agricultural sector.
What are the BRMs Program in GF2 (Growing Forward)? (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 Productions Insurance Program (protects against fluctuations in livestock)
How are BRMs programs funded?
- Agri-Insurance, Agri-Stability, Agri-Investment, WLPIP funded by producer-provincial-federal
- Agri-Recovery funded by provincial-federal
- Advance Payment Program funded by federal
Define Probable Yield.
It is the expected yield of an agricultural product (measures coverage in yield-based plans).
What is a Balance-Back factor?
It is a factor applied to the aggregate premium to correct for individual discounts and surcharges.
What are Risk-Splitting benefits?
They are indemnities based on a subset of production (for a given agricultural product).
Define the Uncertainty Load (or risk margin).
It is a load in rates to account for limitations in data, assumptions, and methods.
Define Self-Sustainability Load.
A load in rates to recover deficits and maintain surplus.
What are the reasons for uncertainty and self-sustainability loads?
- Uncertainty Load: covers future contingencies
- Self-sustainability Load: recovers past deficits
Actuarial Certification - What is the content of the actuarial certification? (3)
The Actuarial Certification should provide an opinion on:
i) method for calculating probable yield (for deriving exposure for yield-based plan)
ii) method on pricing
iii) self-sustainability of the program
Actuarial Certification - Why is it required?
In order to obtain 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?
- significant changes in program design or methods
- new crops
What are the key elements of Canadian Agri-Insurance Regulation? (4)
- minimum deductible = 10%
- probable yields must reflect DEMONSTRATED production capability (in order to prevent over insurance)
- rate must be ACTUARIALLY SOUND (including self-sustainability load + relevant costs)
- Actuarial Certification is required (if uncertified, then the federal government may reduce the premium contribution to the province)
Identify the main types of Agri-Insurance plans & provide examples for each. (2)
- yield-based plans (individual or collective)
- non-yield-based plans (weather derivative, acre based, mortality for livestock)
When does a yield-based plan pay?
It would pay when: an individual or collective production is less than the production guarantee FOR a specified agricultural product.
Define proxy crop coverage.
It is when the payment rate for a given crop is BASED ON the payment rate for another crop WITH MORE RELIABLE (production, price) data.
What is the coverage trigger for the non-yield based, weather derivative plan?
Trigger: when a pre-determined meteorological threshold has been breached, REGARDLESS of the actual production.
What is the coverage trigger for the non-yield based, tree mortality plan?
Trigger: when more than a certain % of the tress are destroyed by an insured peril, REGARDLESS of the actual production.
What is the formula for probable yield in a yield-based plan?
It is the AVERAGE of the yearly production yields.
Adjustments to historical years - What is the purpose of these adjustments?
In order to reflect current production capability (similar to on-leveling premiums).
Adjustments to historical years - What are the triggers for making such adjustments? (5)
- 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 on crop from year to year (due to insured perils or other causes)
Adjustments to historical years - What actuarial input is required regarding these adjustments (ie: Actuarial Certification)?
REVIEW: trends
DISCLOSE: reliance on agricultural experts for other adjustments
Stabilizing methods for probable yields - Identify the stabilizing methods (6)
- AVERAGE: over the long-term (15-25 yrs)
- CUSHIONING: give data outliers smaller weights when averaging
- SMOOTHING: apply floors or ceilings to data points
- CAPPING: apply caps to limit year-over-year changes
- SPLITTING: split basic and excess coverage since excess coverage is more volatile
- TRANSITION RULES: use after introducing new methodology in order to smooth transition
What is the formula for Yield-Based plans?
PG = APC L$ = APC * (insured unit price) where A = insured area P = probable yield per unit of area C = coverage level %
What is the formula for Non-Yield-Based plan?
PG formula is not applicable since there is NO production guarantee for non-yield based plans:
L$ = (# of insured units) * (insured unit price)
What is the formula for indemnity $ for Yield-based plans?
Indem$ = max(0, PG - AP) * (insured unit price)
where
PG = Production Guarantee
AP = Actual Production
What are the optional coverages under the production insurance program? (4)
- quality loss
- spot loss (hail)
- reseeding the crop (time-permitting)
- unseeded crop (due to excess moisture during planting season)
Non-Yield-Based plan - Types of weather event that are covered (3+)
- excessive rainfall
- drought
- freeze
- etc.
Non-Yield-Based plan - Identify variables that affect compensation in such plans (3)
- # of units affected
- insured price
- deductible
PIP (Production Insurance Program) - What are included/excluded in rate calculations for PIP?
The expected loss only.
- administrative costs are shared between federal and provincial governments
PIP (Production Insurance Program) - What is the formula for Prem$?
Prem$ = PremRate * L$
note: PremRT varies by coverage %
PIP (Production Insurance Program) - What is the formula for Indem$ (& IndemRate)?
Indem$ = IndemRate * L$
note: 1st calculation is the Indem$, THEN using the above formula calculate the IndemRate, THEN feed the IndemRate it into the PremRate calculation
PIP (Production Insurance Program) - What are the consequences of rate instability?
- fluctuations in participation
- adverse selection
PIP (Production Insurance Program) - What load factors must be incorporated to arrive at the final PremRate? (5)
To get the PREMIUM RATE, start with the INDEMNITY RATE, then incorporate:
- uncertainty margin
- balance-back factors
- individual discount/surcharge
- reinsurance load
- self-sustainability load
PIP (Production Insurance Program) - What is the effect of severe loss years on rates?
Indem$ UP:
- thus, IndemRate UP & Self-sustain load UP (to replenish surplus)
- thus, PremRate UP
- thus, Prem$ UP
PIP (Production Insurance Program) - How are non-yield-based plans priced?
- same as yield-based plans (IndemRt(Uncert,Balance,Disc/Sur,Reins,Self-sus)) but possibly with extra considerations
eg: weather-derivative plans have extra considerations like temperature thresholds
PIP (Production Insurance Program) - Identify pricing considerations for weather derivative plans
DATA: long-term history of meteorological data (vs producer data)
EFFECTS: how weather affects production losses
PIP (Production Insurance Program) - Identify the cost-share levels (3)
- comprehensive (0-80%)
- high (80-93%)
- catastrophic (93-100%)
PIP (Production Insurance Program) - Identify how are costs shared between producers, provincial and federal government? (3)
- comprehensive (producers-provincial-federal)
- high (producer-provincial-federal)
- catastrophic (provincial-federal)
What is the federal requirement for self-sustainability?
FOR ALL scenarios (base and adverse) with INITIAL DEFICIT = 6th year 95th percentile:
- MUST RECOVER DEFICIT IN 15 years on average, and 25 year with a probability of 80%.
What is the BASIS for the self-sustainability load selection?
LOAD BASIS = (selected target surplus level) and can be expressed in diff ways:
- $-value
- % of liability dollars
- multiple of premiums
- percentile over a given time horizon
What is the source of VOLATILITY in stochastic simulations of 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 the adverse scenarios relevant to self-sustainability in agri-insurance. (6)
- increase in liabilities (increase max exposure)
- decrease in liabilities (can be severe when surplus is vulnerable after a 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
Self Sustainability Testing - compare the agricultural self-sustainability to DCAT?
SIMILARITY: both consider base and adverse scenarios
DIFFERENCE: agricultural self-sustainability uses a fully stochastic simulation over a longer period of time
Is the government reinsurance for agri-insurance considered traditional insurance?
- NO, it’s an optional deficit-financial scheme
- province may finance deficits as they occur vs regularly contributing to a government reinsurance fund
Describe the FUNDING mechanism for the government reinsurance for agri-insurance.
- provincial producer programs contribute a % of the premium to provincial and federal reinsurance
- amount is based on the surplus position and the risk profile
- must self-sustain for 25 years
What triggers government reinsurance for an agro-insurance program?
- when the SURPLUS of the production insurance fund is DEPLETED
- note that indemnities net of provincial insurance are paid out of production insurance fund first
Identify the roles and responsibilities of the Federal government in agri-insurance programs.
- develop guidelines for production insurance program
- provide financing mechanism when programs are in a deficit position
Identify the roles and responsibilities of the Provincial government in agri-insurance programs.
- determine the probable yield and the premium rate
- manage claims
Identify the roles and responsibilities of the producers in agri-insurance programs.
- pay their share of the premium
- report on their yields
Identify the roles and responsibilities of the Private Insurance & Reinsurance companies in agri-insurance programs.
PRIVATE INSURANCE: provides coverage for producer for perils not covered under the government insurance (eg: Fire)
REINSURANCE: provide reinsurance for government insurance
- Compare the different triggers for:
i) Actuarial Certification
ii) Historical Adjustments to Probable Yield
iii) Risk Transfer Test
i) : - significant changes in program designs or method
- new crops
ii) : - change in farming or management practices
- change in insurance program design
- 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)
iii) - inception of contract
- when a contract change significantly alters the 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 aspect)
- Examples of areas where Transition Rules are used.
Agricultural Insurance:
- Probable Yield calculation: it is a stabilizing method used after a new methodology is introduced (smooths the transition)
- Rating: prevents individual policyholders from getting a big rate change all at once.
- Examples of areas where stochastic models are used. (3)
- 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)
