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CAS Exam 6C > Chevalier - Agricultural Risk Programs > Flashcards

Chevalier - Agricultural Risk Programs Flashcards

1
Q

What is Growing Forward 2?

A

A comprehensive federal-provincial-territorial framework for Canada’s agricultural sector.

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2
Q

What are the BRMs Program in GF2 (Growing Forward)? (6)

A

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)

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3
Q

How are BRMs programs funded?

A
  • Agri-Insurance, Agri-Stability, Agri-Investment, WLPIP funded by producer-provincial-federal
  • Agri-Recovery funded by provincial-federal
  • Advance Payment Program funded by federal
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4
Q

Define Probable Yield.

A

It is the expected yield of an agricultural product (measures coverage in yield-based plans).

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5
Q

What is a Balance-Back factor?

A

It is a factor applied to the aggregate premium to correct for individual discounts and surcharges.

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6
Q

What are Risk-Splitting benefits?

A

They are indemnities based on a subset of production (for a given agricultural product).

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7
Q

Define the Uncertainty Load (or risk margin).

A

It is a load in rates to account for limitations in data, assumptions, and methods.

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8
Q

Define Self-Sustainability Load.

A

A load in rates to recover deficits and maintain surplus.

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9
Q

What are the reasons for uncertainty and self-sustainability loads?

A
  • Uncertainty Load: covers future contingencies

- Self-sustainability Load: recovers past deficits

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10
Q

Actuarial Certification - What is the content of the actuarial certification? (3)

A

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

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11
Q

Actuarial Certification - Why is it required?

A

In order to obtain federal funding.

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12
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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13
Q

Actuarial Certification - What triggers the requirement of a new certification?

A
  • significant changes in program design or methods

- new crops

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14
Q

What are the key elements of Canadian Agri-Insurance Regulation? (4)

A
  • 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)
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15
Q

Identify the main types of Agri-Insurance plans & provide examples for each. (2)

A
  • yield-based plans (individual or collective)

- non-yield-based plans (weather derivative, acre based, mortality for livestock)

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16
Q

When does a yield-based plan pay?

A

It would pay when: an individual or collective production is less than the production guarantee FOR a specified agricultural product.

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17
Q

Define proxy crop coverage.

A

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.

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18
Q

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

A

Trigger: when a pre-determined meteorological threshold has been breached, REGARDLESS of the actual production.

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19
Q

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

A

Trigger: when more than a certain % of the tress are destroyed by an insured peril, REGARDLESS of the actual production.

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20
Q

What is the formula for probable yield in a yield-based plan?

A

It is the AVERAGE of the yearly production yields.

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21
Q

Adjustments to historical years - What is the purpose of these adjustments?

A

In order to reflect current production capability (similar to on-leveling premiums).

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22
Q

Adjustments to historical years - What are the triggers for making such adjustments? (5)

A
  • 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)
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23
Q

Adjustments to historical years - What actuarial input is required regarding these adjustments (ie: Actuarial Certification)?

A

REVIEW: trends
DISCLOSE: reliance on agricultural experts for other adjustments

24
Q

Stabilizing methods for probable yields - Identify the stabilizing methods (6)

A
  • 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
25
Q

What is the formula for Yield-Based plans?

A 
PG = APC
L$ = APC * (insured unit price)
where
A = insured area
P = probable yield per unit of area
C = coverage level %
26
Q

What is the formula for Non-Yield-Based plan?

A

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

27
Q

What is the formula for indemnity $ for Yield-based plans?

A

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

28
Q

What are the optional coverages under the production insurance program? (4)

A
  • quality loss
  • spot loss (hail)
  • reseeding the crop (time-permitting)
  • unseeded crop (due to excess moisture during planting season)
29
Q

Non-Yield-Based plan - Types of weather event that are covered (3+)

A
  • excessive rainfall
  • drought
  • freeze
  • etc.
30
Q

Non-Yield-Based plan - Identify variables that affect compensation in such plans (3)

A
  • # of units affected
  • insured price
  • deductible
31
Q

PIP (Production Insurance Program) - What are included/excluded in rate calculations for PIP?

A

The expected loss only.

- administrative costs are shared between federal and provincial governments

32
Q

PIP (Production Insurance Program) - What is the formula for Prem$?

A

Prem$ = PremRate * L$

note: PremRT varies by coverage %

33
Q

PIP (Production Insurance Program) - What is the formula for Indem$ (& IndemRate)?

A

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

34
Q

PIP (Production Insurance Program) - What are the consequences of rate instability?

A
  • fluctuations in participation

- adverse selection

35
Q

PIP (Production Insurance Program) - What load factors must be incorporated to arrive at the final PremRate? (5)

A

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
36
Q

PIP (Production Insurance Program) - What is the effect of severe loss years on rates?

A

Indem$ UP:

  • thus, IndemRate UP & Self-sustain load UP (to replenish surplus)
  • thus, PremRate UP
  • thus, Prem$ UP
37
Q

PIP (Production Insurance Program) - How are non-yield-based plans priced?

A
  • 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
38
Q

PIP (Production Insurance Program) - Identify pricing considerations for weather derivative plans

A

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

39
Q

PIP (Production Insurance Program) - Identify the cost-share levels (3)

A
  • comprehensive (0-80%)
  • high (80-93%)
  • catastrophic (93-100%)
40
Q

PIP (Production Insurance Program) - Identify how are costs shared between producers, provincial and federal government? (3)

A
  • comprehensive (producers-provincial-federal)
  • high (producer-provincial-federal)
  • catastrophic (provincial-federal)
41
Q

What is the federal requirement for self-sustainability?

A

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%.

42
Q

What is the BASIS for the self-sustainability load selection?

A

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
43
Q

What is the source of VOLATILITY in stochastic simulations of sustainability?

A
  • mainly the indemnity component

- because the probable yield & premium rate methodologies are designed to avoid large year-to-year variations

44
Q

What is the actuary’s role regarding the self-sustainability test?

A

The actuary should design OR confirm the methodology for calculating the self-sustainability load.

45
Q

Actuary - Identify the adverse scenarios relevant to self-sustainability in agri-insurance. (6)

A
  • 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
46
Q

Self Sustainability Testing - compare the agricultural self-sustainability to DCAT?

A

SIMILARITY: both consider base and adverse scenarios
DIFFERENCE: agricultural self-sustainability uses a fully stochastic simulation over a longer period of time

47
Q

Is the government reinsurance for agri-insurance considered traditional insurance?

A
  • NO, it’s an optional deficit-financial scheme

- province may finance deficits as they occur vs regularly contributing to a government reinsurance fund

48
Q

Describe the FUNDING mechanism for the government reinsurance for agri-insurance.

A
  • 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
49
Q

What triggers government reinsurance for an agro-insurance program?

A
  • 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
50
Q

Identify the roles and responsibilities of the Federal government in agri-insurance programs.

A
  • develop guidelines for production insurance program

- provide financing mechanism when programs are in a deficit position

51
Q

Identify the roles and responsibilities of the Provincial government in agri-insurance programs.

A
  • determine the probable yield and the premium rate

- manage claims

52
Q

Identify the roles and responsibilities of the producers in agri-insurance programs.

A
  • pay their share of the premium

- report on their yields

53
Q

Identify the roles and responsibilities of the Private Insurance & Reinsurance companies in agri-insurance programs.

A

PRIVATE INSURANCE: provides coverage for producer for perils not covered under the government insurance (eg: Fire)
REINSURANCE: provide reinsurance for government insurance

54
Q
  • Compare the different triggers for:
    i) Actuarial Certification
    ii) Historical Adjustments to Probable Yield
    iii) Risk Transfer Test
A

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

55
Q
  • Examples of areas where Actuarial Certifications are required. (4)
A
  • Agricultural Insurance Production Programs
  • Risk Transfer analysis
  • Valuation of Reserves
  • Rate Filings (certain aspect)
56
Q
  • Examples of areas where Transition Rules are used.
A

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.
57
Q
  • Examples of areas where stochastic models are used. (3)
A
  • 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)

CAS Exam 6C (70 decks)

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