Chevalier - Agricultural Risk Programs

Question 1

What is Growing Forward 2?

Answer 1

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

Question 2

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

Answer 2

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)

Question 3

How are BRMs programs funded?

Answer 3

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

Question 4

Define Probable Yield.

Answer 4

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

Question 5

What is a Balance-Back factor?

Answer 5

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

Question 6

What are Risk-Splitting benefits?

Answer 6

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

Question 7

Define the Uncertainty Load (or risk margin).

Answer 7

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

Question 8

Define Self-Sustainability Load.

Answer 8

A load in rates to recover deficits and maintain surplus.

Question 9

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

Answer 9

• Uncertainty Load: covers future contingencies

- Self-sustainability Load: recovers past deficits

Question 10

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

Answer 10

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

Question 11

Actuarial Certification - Why is it required?

Answer 11

In order to obtain federal funding.

Question 12

Actuarial Certification - How often is it required?

Answer 12

• frequency is determined using a RISK-BASED approach

- at least every 5 years

Question 13

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

Answer 13

• significant changes in program design or methods

- new crops

Question 14

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

Answer 14

• 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)

Question 15

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

Answer 15

• yield-based plans (individual or collective)

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

Question 16

When does a yield-based plan pay?

Answer 16

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

Question 17

Define proxy crop coverage.

Answer 17

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.

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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

Question 20

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

Answer 20

It is the AVERAGE of the yearly production yields.

Question 21

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

Answer 21

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

Question 22

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

Answer 22

• 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)

Question 23

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

Answer 23

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

Question 24

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

Answer 24

• 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

Question 25

What is the formula for Yield-Based plans?

Answer 25

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

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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

Question 29

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

Answer 29

- excessive rainfall - drought - freeze - etc.

Question 30

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

Answer 30

- # of units affected - insured price - deductible

Question 31

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

Answer 31

The expected loss only. | - administrative costs are shared between federal and provincial governments

Question 32

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

Answer 32

Prem$ = PremRate * L$ | note: PremRT varies by coverage %

Question 33

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

Answer 33

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

Question 34

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

Answer 34

- fluctuations in participation | - adverse selection

Question 35

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

Answer 35

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

Question 36

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

Answer 36

Indem$ UP: - thus, IndemRate UP & Self-sustain load UP (to replenish surplus) - thus, PremRate UP - thus, Prem$ UP

Question 37

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

Answer 37

- 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

Question 38

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

Answer 38

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

Question 39

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

Answer 39

- comprehensive (0-80%) - high (80-93%) - catastrophic (93-100%)

Question 40

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

Answer 40

- comprehensive (producers-provincial-federal) - high (producer-provincial-federal) - catastrophic (provincial-federal)

Question 41

What is the federal requirement for self-sustainability?

Answer 41

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%.

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

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

Question 45

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

Answer 45

- 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

Question 46

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

Answer 46

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

Question 47

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

Answer 47

- NO, it's an optional deficit-financial scheme | - province may finance deficits as they occur vs regularly contributing to a government reinsurance fund

Question 48

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

Answer 48

- 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

Question 49

What triggers government reinsurance for an agro-insurance program?

Answer 49

- 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

Question 50

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

Answer 50

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

Question 51

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

Answer 51

- determine the probable yield and the premium rate | - manage claims

Question 52

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

Answer 52

- pay their share of the premium | - report on their yields

Question 53

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

Answer 53

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

Question 54

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

Answer 54

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

Question 55

* Examples of areas where Actuarial Certifications are required. (4)

Answer 55

- Agricultural Insurance Production Programs - Risk Transfer analysis - Valuation of Reserves - Rate Filings (certain aspect)

Question 56

* Examples of areas where Transition Rules are used.

Answer 56

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.

Question 57

* Examples of areas where stochastic models are used. (3)

Answer 57

- 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)