H. 26-28

Front 1

Agricultural Risk Management Programs

Back 1

Agricultural Risk Management Programs

Front 2

Probable/insured yield

Back 2

Expected yield of an agricultural product, measure of coverage for a yield-based insurance plan, often corresponds to long-term average yield.

Front 3

Production guarantee

Back 3

For yield-based plans, total insured production determined as the product of insured area, probable yield and selected coverage level

Insured Area x Prob. Yield per Unit of Area x Coverage Level

Front 4

Production margin

Back 4

Total farm allowable income net of allowable expenses

Front 5

Production value

Back 5

Product of number of units insured, yield per unit (yield-based plans only) and price

Front 6

Risk-splitting benefits

Back 6

Benefits payable under plan where indemnities based on subset of total farm production for given agricultural product

Front 7

Self-sustainability load

Back 7

Load applicable to premiums to recover past deficits and maintain surplus level appropriate to sustain volatility in loss experience.

Recovers historical deficits.

Front 8

Uncertainty margin (risk margin)

Back 8

Load in projected premium rates for limitations with data, assumptions or methodologies in estimating future indemnity rates.

Creates conservative estimate accounting for the future.

Front 9

AgriInsurance

Back 9

Individual producers can obtain production insurance coverage guaranteeing predetermined level of production

Front 10

AgriStability

Back 10

- Payments made to producers in years with declines of at least 30% in their annual production margin relative to their historical margins.

- AgriStability payments apply after several other recoveries, including Agrilnsurance.

Front 11

AgriInvest

Back 11

- Deposit-matching program so producers can accumulate funds to manage income shortfalls or to make investments to manage farm risks

- Receive matching government deposit on up to first 1%, subject to limit of $15,000

Front 12

AgriRecovery

Back 12

a) Case-by-case basis to help producers with extraordinary expenses to recover from natural disasters such as disease, pest and weather events

b) Does not cover losses from pricing cycles or long-term downward trends

Extraordinary costs usually attributable to

a) Mitigation expenses or expenses necessary to resume operations

b) Payments cover costs not recoverable under other programs

Front 13

Advance Payments Program (APP)

Back 13

1. Provides access to short-term low-interest loans to improve cash flow

2. Can seek cash advance via an APP administrator for up to 50% of estimated value of agricultural production, subject to max of $400,000

3) Fed gov assumes interest payable on first $100,000 of each cash advance

4) Producers must repay advance to APP admin by end of production period

Front 14

Western Livestock Price Insurance Program (WLPIP)

Back 14

1. WLPIP a pilot program launched in April 2014 to help livestock producers in case of unexpected price decline

2. Program actuarially sound and self-sustaining following actuarial guidelines - Premiums funded by producers

Front 15

Actuarial certifications AgriInsurance (3)

Back 15

a) Probable yield methodologies to derive exposure for yield-based plans

b) Premium rate methodologies used to fund the insurance program

c) Self-sustainability of the insurance program.

Front 16

Key elements of production insurance regulation (4)

Back 16

a) Offered coverage level may not exceed 90% of probable yield/value of production (producers retain minimum loss deductible of 10%);

b) Probable yields must accurately reflect product' s demonstrated production capability and province must submit probable yield tests to show methodologies do not result in over-insurance

c) Premium rates must be:

(1) Actuarially sound

(2) Include a self-sustainability load

(3) Reflect all elements with cost implications other than administration expenses

d) Probable yield methodologies, premium rate methodologies and assessments of self-sustainability must be:

(1) Certified by an actuary

(2) Meet National Certification Guidelines established by AAFC

Front 17

National Certification Guidelines developed by AAFC provide guidance on common actuarial practices (4)

Back 17

(1) Data reliance: disclose extent of reliance on others

(2) Documentation of work: be detailed enough for another actuary to reproduce calculations using appropriate data.

(3) Actuarial judgment

(4) Materiality standard

Front 18

Types of yield-based plans (3)

Back 18

a) Individual yield program: indemnity paid out when individual producer's production falls below guarantee for specified agricultural product.

b) Collective yield program: indemnity paid out when collective production for given group falls below collective guarantee for specified agricultural product: indemnity determined regardless of individual actual production

c) Proxy crop coverage: where payment rate for a given crop based on rate for another crop with more reliable production and price data.

Front 19

Types of non-yield-based plans (4)

Back 19

1) Weather-derivative plans

2) Acre-based compensation horticulture

3) Coverage for perennial plans e.g. trees

4) Mortality insurance for livestock and poultry

Front 20

Adjustments to historical probable yield (4)

Back 20

(1) Changes in farming or management practices

(2) Changes in insurance program design

(3) Adjustments for quality, required where an insured peril would affect quality, not just quantity, of production

(4) Variations in mix of insureds over time and across regions

Front 21

Credibility complements (4)

Back 21

(a) Larger group of data

(b) Proxy agricultural product

(c) Theoretical model

(d) Simulation

Front 22

Probable yield stabilizing/mitigating techniques (4)

Back 22

(I) Long-term averaging methods

(2) Cushioning: Occurrences outside of given statistical measure of deviation around mean may be allocated smaller weights

(3) Smoothing: Applying floors and ceilings to historical yields outside of a given statistical measure of deviation around mean

(4) Capping in year-over-year changes in probable yield

Front 23

Liability

Back 23

Production guarantee x Insured Price

Front 24

Indemnity

Back 24

Max(0, Production guarantee - Actual production) x Insured Price

Front 25

Indemnity rate

Back 25

Indemnity/Liabilities

Front 26

Optional benefits of yield-based plans (4)

Back 26

(1) Quality loss protection

(2) Reseeding benefits, when damages occur early in season

(3) Unseeded acreage benefits, if crops remain unseeded as of a given date due to excessive moisture

(4) Establishment benefits, for crops that fail to establish due to insurable causes

Front 27

Premium rate stabilizing/mitigating techniques (4)

Back 27

a) Long-term averaging methods, with higher weights for more recent years

b) Splitting indemnity rates into basic and excess components

c) Transition rules after introducing new methodologies

d) Capping in year-over-year changes in indicated indemnity rates

Front 28

Comparison self-sustainability load and DCAT (2)

Back 28

a) Similar as consists of analysis under base and adverse scenarios

b) Different as fully stochastic analysis over a longer time horizon.

Front 29

Selecting self-sustainability load (2)

Back 29

a) Designed or confirmed by actuary based on simulations

b) Self-sustainability load based on selected target surplus level recommended by the actuary

Front 30

Production insurance program self sustainable if (2)

Back 30

a) Recovery from 95th percentile deficit occurs, on average, within 15 years AND

b) Recovery from 95th percentile deficit occurs, with 80% probability, within 25 years

Front 31

Responsibilities of:- federal government (2)- provincial government (2)- producers (2)- insurers (2)

Back 31

a. Government of Canada:

(i) Pay a portion of premium;

(ii) Act as a reinsurer to provincial plans.

b. Provincial Government:

(i) Determine the appropriate premium

(ii) Adjust losses

c. Canadian Producers:

(i) Manage crop normally

(ii) Pay a portion of premium

d. Private Insurance/Reinsurance Companies:

(i) Not involved in production insurance though theymight act as reinsurers to provincial plans

(ii) Provide other coverage like spot-loss hail coverage toproducers

Front 32

CAS, Government Insurers

Back 32

CAS, Government Insurers

Front 33

Reasons for government participation in insurance (5)

Back 33

- Filling needs unmet by private insurance

- Compulsory purchase of insurance

- Convenience

- Greater effficiency

- Social purposes

Front 34

Filling needs unmet by private insurance (3)

Back 34

1. Residual market philosophy

a. Insurance unavailable

b. Insurance unaffordable

2. Government requirements different from private insurance requirements

a. Can raise taxes in order to subsidize

b. Can charge less than the actuarial rates

3. Crop and Flood insurance available because of this

e.g. Federal Crime Insurance Program (HO coverage in neighbourhoods with high crime rates)

Front 35

Compulsory purchase of insurance (2)

Back 35

1. Sometimes government requires insurance purchase; must make available

2. High risk/subsidized auto insurance for people unable to buy on open market

e.g. worker's compensation insurance

Front 36

Convenience (3)

Back 36

1. Easier for government to set up program quickly than private market

2. May also be already set up to provide services needed by insurance program, such as lossmitigation development and funding

3. May not be justified if private market available and willing

e.g. Florida Hurricane Catastrophe Fund

Front 37

Greater efficiency (3)

Back 37

1. Lower costs (no commission,…)

2. Many costs are identical for both government and private insurance: administration, etc.

3. Cost savings may be overstated (done by other departments)

Front 38

Social purposes (2)

Back 38

1. May be main reason for government insurance programs

2. Some goals may be achievable only through government

a. rehabilitation and vocational training of injured workers

b. protecting truly needy elderly and disabled

3. Building codes and zoning requirements in flood zones

e.g. Social Security

Front 39

Levels of government participation (3)

Back 39

1. Exclusive insurer

2. Partnership with private insurers: offering reinsurance on specific exposures

3. Competitor to private insurers

Front 40

Evaluation of government insurance programs (3)

Back 40

1. Is the provision of the insurance by the government necessary or does it achieve a social purpose that cannot be provided by private insurance?

2. Is it insurance or a social welfare program?

3. Is the program efficient, is it accepted by the public?

Front 41

Dibra, Why Insurers Fail

Back 41

Dibra, Why Insurers Fail

Front 42

Insolvency

Back 42

involuntary exit from the market precipitated by a winding-up order issued by the appropriate supervisory authority

Front 43

Causes of winding-up and involuntary exit (2)

Back 43

a. Insolvency risk -risk that occurs "when assets become insufficient for an insurance company to meet its contractual and other fmancial obligations"

b. Liquidity risk -risk that occurs when an insurer "has sufficient assets to cover its obligations but there is a high level of risk that those could disappear"

Front 44

External factors influencing insolvency (4)

Back 44

a. Underwriting cycle: more insolvencies in soft market

b. Increased frequency and severity of extreme weather events: not really in Canada

c. General economic and financial market volatility: more insolvencies when volatility is high

d. International developments: more insolvencies when foreign parent

Front 45

Benefits of international insurance companies (3)

Back 45

a. Increases competition

b. Allows greater diversification

c. Allows access to international sources of capital

Front 46

Company characteristics of insolvency (4)

Back 46

1. Governance and Internal Controls: Insolvency risk increases if internal controls and financial reporting circumvented

2. New Entrants: Likelihood of survival increases with the age of a firm

3. Growth:

a. Periods of diminishing capital strength

b. May involve entrance into areas where lack expertise

c. If high interest rates, may hope to offset underwriting losses

4. Firm Size: Insolvent insurers are usually small insurers

Front 47

Main causes of insolvency in Canada (3)

Back 47

1. Foreign parent

2. Inadequate pricing/deficient reserves

3. Rapid growth

Front 48

Problems with reinsurance assets (3)

Back 48

a. Can deteriorate quickly

b. Cannot be readily sold

c. Must be actively managed

Front 49

Nature of reinsurance problems (3)

Back 49

a. Reinsurance mismanagement by insurer rather than reinsurance failure

b. Complex intragroup arrangements

c. Overreliance on reinsurance assets, which are difficult to obtain in a hard market