Agricultural

  1. BRM programs under GF2
    • To help producers manage income instability from changes in market conditions and weather events
    • AgriInsurance, AgriStability, AgriInvest, AgriRecovery, Advance Payments program, Western Livestock price insurance program
  2. AAFC - Responsibilities
    • Growth and dev of agri sector
    • Dev national standards for agri risk mgt programs, incl standards for actuarial certifications for insurance programs
  3. Off-balance factor (Agri programs)
    To correct overall premium collected for discounts/surcharges given to individual producers
  4. Agri - Coverage level
    • % of total expected production value, below which losses are covered (yield-based plans only)
    • 1- coverage level = ded
  5. Production guarantee
    • total insured production value (yield-based plans only)
    • = Insured area * Probably yield per unit of area * Coverage level
  6. Agri - Lilability
    1. Yield-based: limit / amount of insurance coverage (i.e. max losses at harvest) / TIV of an agri product = production guarantee * Insured price
    2. Non-yield-based = # of insured units * insured price per unit
  7. Indemnities
    • Claim amount
      1. yield-based; payable when actual production < production guatantee due to covered perils.
      2. = max (0, Production guarantee - Actual production) * Insured price
      3. non-yield-based = # of units affected * (1-ded) * insured price per unit
  8. Agri - Indemnity rate
    Indemnities / Liabilities
  9. Agri - Premium rate
    • ROL
    • Prem / liabilities
    • Prem = expected losses + uncertainty margin + self-sustainability loads (excl admin expenses)
  10. Probable / insured yield
    Expected yield per unit of exposure for a producer, agri product and crop year, as the measure of coverage for yield-based plan.
  11. Production value
    # of units insured * Yield per unit * Price
  12. Risk-splitting benefit
    Indemnities based on a subset of total farm production for a given agri product
  13. Self-sustainability load - Purpose
    • to recover past deficits / redistribute surplus based on selected level
    • purpose to maintain a certain surplus level for the fund to survive in adverse scenarios
  14. Uncertainty margin - Purpose
    • Risk margin to ensure conservative estimates
    • Account for limitations with data, assumptions or methods and stat volatility
    • High for crops with sparse data, change in program design or YOY loss volatility
  15. Why both Self-sustainability load and Uncertainty margin are needed
    • Uncertainty creates conservative estimates for future
    • self‐sustainability load recovers historical deficits.
  16. Yield
    Production per unit of exposrue (e.g. kg/acre)
  17. AgriInsurance - Objectives
    Production insurance with protection for producers's revenue against uncontrollable production losses (hail, drought, flood)
  18. AgriInsurance - Premium methodologies
    • Expected losses / indemnity rate: LT avg adjusted for program conditions, changes in probable yield methods, trend
    • Balance-back: to ensure overall adequate while differentiating among producers based on experience to encourage loss prevention & mitigation
    • Uncertainty margin
    • Self-sustainability loads
    • Reinsurance load: when prov purchases private reins, allocation of reinsurance to plans
    • Excludes admin expenses, profit
  19. Non-yield-based plans premium methodologies / considerations
    Non‐yield based plans don’t pay out benefits based on production level but based on predetermined occurrence of an event, may be weather related. considerations:
    • need TP data to estimate the probability of the event occurring
    • estimated benefits which will be paid if the event occurs
  20. AgriInsurance - Indemnity rate methodologies
    • Indemnity rates are basis for prem. both hist indemnities and liabilities are adjusted
    • Complement of credibility
    • Balance premium responsiveness and stability
  21. Adj's to hist indemnities and lilabilities
    • Current probable yield methods
    • Current program conditions (insured perils)
    • Trends
    • Coverage level
    • Quality
    • Changes in mix of insureds
  22. Indemnity Rate - Types of complement of credibility
    • Larger group of data (prov avg)
    • Proxy agri product
    • Theoretical model
    • Simulation
    • Prior judgmental selection
  23. Indemnity rate - Stabilizing or mitigating techniques
    1. LT averaging methods, with higher weights to more recent years
    2. Split into basic and excess:
      • basic more credible / stable
      • excess more volatile and use longer period or a larger group of data
    3. Transition rules after introducing new methods
    4. Capping YOY changes in indicated
  24. AgriInsurance - Funding
    • Shared btw producers, prov and fed.
    • Admin is shared btw prov and fed
  25. AgriStability
    Protects producers against decrease in their production income, due to an increase in expenses, a decrease in prices or a decrease in production
  26. AgriStability - Funding
    • Mainly by prov and fed
    • Producers make some contributions to cover portion of expected losses and admin
  27. AgriInvest
    Program to encourage producers to save money. Gov will match up to first 1% (max 15,000).
  28. AgriInvest - Mechanism
    • Producers can deposit up to 100% of their annual allowable net sales and receive matching gov deposit on up to 1st 1%, subj to 15k limit
    • Amount allowable is capped at 400% of avg allowable net sales.
  29. AgriInvest - Funding
    Shared between prov and fed
  30. AgriRecovery
    Disaster recovery program which is assessed on a case by case basis
  31. AgriRecovery - Funding
    Prov and Fed
  32. Advance payment program
    Provides low interest short term loans to producers
  33. Advance payment program - Mechanism
    Producer would seek cash advance thru a APP administrator for up to 50% of estimated value of their agri production, subj to max cash advance of 400k
  34. Advance payment program - Funding
    Fed
  35. Western livestock price insurance program
    Protects against fluctuations in market value of livestock.
  36. Western livestock price ins program - funding
    Prov and Fed
  37. Prov production insurance programs: actuarial certifications in order to receive fed contribution
    1. probable yield methods to derive insured exposure for yield based plans
    2. premium rate methods to fund insurance program
    3. self-sustainability of insurance program
  38. Key elements of production insurance regulations (applies to all fedly cost-shared production programs)
    1. coverage level below 90% of probable yield or production value
    2. probable yields:
      • reflect product's production capability
      • province must submit probable yield tests to show methods do not lead to over-insurance
    3. premium rates actuarially sound:
      • incl self-sustainable load
      • reflet all elements of plan that cost $ (other than admin)
    4. act cert required for probably yield, premium rate methods and self-sustainability
    5. if prov doesn't submit, fed may reduce contributions to prov program
  39. National Certification Guidelines developed by AAFC provide guidance on common actuarial practices
    1. Data reliance: disclose reliance on others
    2. Documentaion of work: detailed enough for another actuary to reproduce calc given appropriate data
    3. Actuarial judgment: clearly document.
    4. Disclose materiality standard
  40. Types of yield-based plans
    1. Individual yield: pay when individual production falls < production guarantee
    2. Collective yield: pay when collective production for a group of producers or area falls < collective production guarantee (individual production irrelevant)
    3. Proxy crop coverage: payment rate for a crop based on another crop with more reliable production and data.
  41. Types of non-yield-based plans
    1. weather-derivative plans:
      • pay based on weather event (excess moisture, drought), actual production irrelevant.
      • e.g. indemnity = 50% of insured value if > 5 consecutive days of rainfall > 10mm
    2. acre-based:
      • protect a field against adverse event based on size.
      • e.g. Destruction of 50% of field due to fire (production irrelevant)
    3. perennial coverage:
      • pay based on # of trees subject to a deductible
      • e.g. when > 5% of insured apple trees detroyed by covered peril based on # insured trees, # damaged trees, insured value of damaged trees
    4. mortality insurance:
      • based on probability of death from an insured peril,
      • e.g. hog mortality from disease
  42. Probable yield defn, calculation
    • defn: expected yield per unit of exposure for a given producer, product and year.
    • calc:
      • averaging producer's own actual yields
      • use an area/prov avg yield and apply a producer productivity index (a differential that reflects producer's expected performance vs. avg)
    • example on page 9
  43. Adj's to hist probable yields to reflect current production capability of a product
    Changes in
    • farming and mgt practices
    • insurance program design
    • technology
    • weather patterns
    • mix of insureds over time and across geo regions
  44. Probable yield Stabilizing and mitigating techniques
    1. LT averaging methods
    2. Cushioning: less weight to occ's outside of given stat measure of deviation around mean to avoid distortions
    3. Smoothing: floors and ceilings to hist yields outside of given stat measure of deviation around mean
    4. Capping YOY change in probable yields
  45. Probable yield tests
    • Compare probable (expected) and actual hist yields.
    • Required per fed to ensure methodologies don't lead to over-insurance
  46. Optional benefits for yield-based plans
    • quality loss: compensate for decrease in quality of agri production due to covered peril
    • reseeding: costs to reseed when damages occur early in the season with enough time to reseed
    • unseeded crop: pay for loss of income of unseeded crop due to covered peril
    • hail spot loss: cost for hail damages
    • emergency works: pay for cost to mitigate further damages when there's partial damage to a crop
  47. Self-sustainability assessment - Act cert objective
    ensure:
    • sufficient financial resources to operate without other capital injections
    • able to recover from severe events within reasonable period of time
    • self-sustainable over a 25 year period / remain at surplus in LT
    • make sure program is sustainable thru having past deficits recovered
  48. Self-sustainability load vs. DCAT
    • Similar:
      • scenario testing
      • forward looking
      • consider all material risks
    • Dif:
      • Self-sustainability: looks at time needed to regain surplus position; DCAT: does not
      • Self-sustainability: fully stochastic, longer time horizon
      • DCAT: done each year; self-sustainability certification: not required every year
      • self-sustainability: projection period of surplus position starts end of 6th year after an event; DCAT: starts at the beginning
  49. Selecting Self-sustainability load
    • Design or confirm methodology based on simulations
    • Load is based on selected target surplus level recommended by actuary
    • Periods of accumulation where surplus > target, load would be lower to redistribute portion of surplus via premium reductions; where surplus < target, higher to collect additional premium to replenish surplus position
  50. Types of surplus target
    • $ value
    • % of liabilities
    • Multiple of premiums (proxy for expected losses)
    • Given percentile over a given horizon
  51. Self-sustainability load methodology - Output of simulation
    Agg BS and IS projection at various percentiles over 25-year period
    1. expected surplus fund balances and ranges of potential surplus fund balances at various points in projection period
    2. premium rate volatility
    3. recovery period from large deficits
    4. sensitivity testing -> conditions that could compromise self-sustainability of the program
  52. Self-sustainability load methodology - Scenarios
    • increase in liabilities: since higher liab translate into higher max losses
    • decrease in liabilities: when surplus position is vulnerable (following CAT) since takes longer to replenish surplus given lower premium income
    • adverse claims experience
    • Intro of new major insurance plans
    • CAT event
    • Reduction in investment returns
  53. Production insurance program self sustainable if
    Recovery from 95th percentile deficit occurs,
    1. on avg, within 15 years
    2. with 80% probability, within 25 years
  54. Gov (prov and fed) reinsurance - Prov contribution
    % of prov premiums to reinsurance funds based on surplus position:
    1. % is lower when financial position is stronger
    2. % varies from prov to prov based on risk profile and surplus fund balances
    3. % established to ensure reinsurance funds are self-sustaining over 25-year period
  55. Gov reinsurance trigger
    • when surplus fund is depleted
    • prov must retain min 2.5% of liab
    • remaining deficit financed at 75%/25% by fed/prov reinsurance fund
  56. Producers role - Production insurance program
    • Contribute to program prem
    • Manage crops normally
    • Report actual yield
  57. Prov gov role - Production insurance program
    • Determine premium rates and collect prem
    • adjust losses
    • Contribute to program prem
    • Contribute to program admin expenses
  58. Fed gov role - Production insurance program
    • Contribute to program prem
    • Contribute to program admin expenses
    • Act as a reinsurer to provincial plans.
  59. Private reinsurance role - Production insurance program
    • Provide private reinsurance coverage
    • Provide other coverages like spot-loss hail
Author
youngt
ID
339049
Card Set
Agricultural
Description
Agricultural risk mgt programs in Canada
Updated