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Exam 6C - Fall 2023 > Chev.Agric > Flashcards

Chev.Agric Flashcards

1
Q

What is GF2 (Growing Forward 2)?

A

Comprehensive federal-provincial-territorial framework for Canada’s agricultural sector

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2
Q

What are the 6 BRM (Business Risk Management) programs in GF2?

A
  1. Agri-Insurance (protects against Production Loss)
  2. Agri-Stability (protects producers against decrease in their production income, can be due to increase in expenses, decrease in price or decrease in production)
  3. Agri-Investment (encourages producers to save money. Government will make the same deposit as they do in the account for the first 1% (max 15K))
  4. Agri-Recovery (disaster recovery program which is assessed on a case by case basis)
  5. Advance Payments Program (low-interest loans for Cash Flow management)
  6. WLPIP - Western Livestock Price Insurance Program (protects against fluctuations in livestock market prices)
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3
Q

Identify purposes of the BRMs (Business Risk Management) in the GF2 other than the pure insurance purposes (6)

A
  • Ensure availability and affordability of agriculture insurance to producers
  • Provide risk mitigation to promote industry stability
  • Support innovation and R&D in agricultural industry
  • Foster competitiveness
  • Enhance market development
  • Ensure sustainable growth
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4
Q

How are the BRMs (Business Risk Management) programs funded?

A

BRM 1,2,3,6 (Agri-Insurance, Agri-Stability, Agri-Investment, WLPIP): funded by producer-provincial-federal

BRM 4 (Agri-Recovery) : funded by provincial-federal

BRM 5 (Advance Payment Program): funded by federal

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5
Q

Define probable yield

A

Represents the expected yield per unit of exposure for a given producer, agricultural product and crop year

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6
Q

Define balance-back factor

A

Factor applied to aggregate premium to correct for individual discounts & surcharges

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7
Q

Define risk-splitting benefits

A

Indemnity based on a subset of production (for a given agricultural product)

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8
Q

Define reinsurance load

A

Load to account for reinsurance costs when the province purchases reinsurance

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9
Q

Define uncertainty load (or risk margin)

A

A load in rates to account for limitations in data, assumptions, methods and statistical volatility

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10
Q

Define self-sustainability load

A

A load in rates to recover deficits & maintain surplus level appropriate to sustain volatility in loss experience

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11
Q

What are the reasons for an uncertainty & self-sustainability load

A

Both are necessary to ensure the program is self-sustainable. Uncertainty creates conservative estimates accounting for the future and the self-sustainability load recovers historical deficits

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12
Q

Actuarial certification - what is the contents of such certification

A

The Actuarial Certification should provide an opinion on:
1. METHOD for calculating probable yield (for deriving exposure for yield-based plans)
2. METHOD for pricing
3. SELF-SUSTAINABILITY of program

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13
Q

Actuarial Certification - why is it required?

A

For federal funding

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14
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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15
Q

Actuarial Certification - what triggers the requirement of a new certification (2)?

A
  • Significant changes in program designs or methods
  • New crops
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16
Q

Actuarial Certification - briefly describe the purpose of probable yield tests

A

To prevent over-insurance

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17
Q

Regulation - key elements of Canadian Agri-Insurance Regulation (4)

A
  • Minimum deductible of 10%
  • Probable yield must reflect DEMONSTRATED production capabilities (to prevent over insurance)
  • rates must be ACTUARIALLY SOUND (include self-sustainability load + relevant costs)
  • Actuarial Certification is required set by AAFC (if uncertified, then federal government may reduce premium contribution to province)
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18
Q

Identify the main types of Agri-Insurance plans & provide examples of each

A

Yield based plan
- Individual: insured production is insured on their own production of the year according to contract
- Collective: Farmers are reimbursed based on production of all insured of an area compared to a historical average. Own production is irrelevant

Non-yield based plan
- weather derivative: based on a weather event (ex: drought)
- Acre-based: have a field protected against adverse event based on size. For example fire.
- Mortality for livestock: based on probability of death from an insured peril. Hog mortality for example

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19
Q

When does yield-based plans pay?

A

Pays when: Individual OR collective production < production guarantee for a specified agricultural product

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20
Q

Define proxy crop coverage

A

When payment rate for a given crop is based on payment rate from another crop with more reliable production/price data

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21
Q

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

A

TRIGGER: when pre-determined meterological thresholds are breached regardless of actual production

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22
Q

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

A

TRIGGER: when more than a certain % of tress are destroyed by an insured peril regardless of actual production

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23
Q

What is the formula for probable yield-based plan

A

Average of yearly production yields

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24
Q

Adjustments to historical yields - what is the purpose of such adjustments

A

To reflect current production capability (similar to on-levelling premium)

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25
Q

Adjustments to historical yields - what are the triggers for making such adjustments (5)

Exam question: briefly describe four adjustments to historical probably yields to estimate the current probable yield

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 of crop from year-to-year (due to insured perils or other cause)
26
Q

Adjustments to historical yields - what actuarial input is required regarding these adjustments (i.e. Actuarial Certification)

A

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

27
Q

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

A

Average:
- Use a long-term average of historical yields (15-25 yrs)

Cap:
- Cap data to limit year-over-year changes in probably yield

Split:
- Split basic & excess coverage since excess coverage is more volatile

Cushion:
- Give data outliers smaller weights when averaging (to cushion their effect & avoid distortions)

Smooth:
- Apply floors/ceilings to data points (to smooth the effect of outliers)

Transition (rules):
- Use transition rules after introducing a new yield method (to smooth the transition)

28
Q

Formulas - yield based plans: (PG,L) or Production Guarantee, Liability

A

PG = A * P * C
L$ = A * P * C * Insured unit price

where:
- A = insured area
- P = probable yield per unit of area
- C = coverage level %

29
Q

Formulas - non-yield based plans: (PG,L) or Production Guarantee, Liability

A

PG formula is not applicable since there is NO production guarantee for non-yield based plans

L$ = # insured units * insured unit price

30
Q

Formulas - yield based plans: indemnity $s

A

Indemn$ = MAX(0,PG-AP)*Insured unit price

where:
- PG = production guarantee
- AP = actual production

31
Q

Non-yield based plan - types of weather events that are covered (3)

A

Excessive rainfall, drought, freeze

32
Q

Non-yield based plan - identify variables that affect compensation in such plans (3)

A

Number of units affected, insured price, deductible

33
Q

Production insurance programs - what are included/excluded in rate calculations for production insurance programs

A

Expected losses only (admin costs are shared between federal & provincial govt)

34
Q

Production insurance programs - Formula for Prem$

A

Prem$ = PremRt * L$ (note that PremRt varies by Covg%)

35
Q

Production insurance programs - Formula for Indem$ (& IndemRt)

A

Indem$ = IndemRt * L$ (Note: first calculate Indem$ using above formula then calculate IndemRt then feed into PremRt)

36
Q

Production insurance programs - what are the consequences of rate instability

A

Fluctuations in participation, adverse selection

37
Q

Production insurance programs - what load factors must be incorporated to arrive at the final PremRt

A

To get Premium Rate, start with Indemnity rate then incorporate:
- Uncertainty margin
- Balance-back factors
- Individual discount/surcharge
- Reinsurance load
- Self-sustainabiliy load

38
Q

Production insurance programs - what is the effect of severe loss yrs on rates

A

Indem$ goes UP
- Leads to increase of IndemRt & increase of Self-Sustainability load (to replenish surplus)
- PremRt increases
- Prem$ increases

39
Q

Production insurance programs - how are NON-yield based plans priced?

A

Same as yield-based plans: IndemRt(UB(+/-)R*S)
- But possibly with extra considerations
Example: Weather-derivative plans may have extra considerations like temperature thresholds

40
Q

Briefly describe two additional considerations that are required for pricing non-yield based plans as compared to pricing yield-based plans

A
  1. How to measure the amount of loss incurred
  2. How to determine whether event has occurred or not
41
Q

Production insurance programs - identify pricing considerations for weather derivative plans (2)

A

Consideration 1 - DATA: long-term history of meterological data vs producer data
Consideration 2 - EFFECTS: how weather affects production losses

42
Q

Production insurance programs - Identify the cost-share levels (refers to sharing of premium contributions)

A

There are 3 cost-sharing levels depending on the severity of the loss:
1. Comprehensive (lowest cost level): 0%-80% in the overall loss distribution
2. High (middle cost level): 80%-93% in the overall loss distribution
3. Catastrophic (highest cost level): 93%-100% in the overall loss distribution

43
Q

Production insurance programs - identify how are costs (premiums) shared between: producer, provincial & federal governments

A

Costs are shared between the producer, province & federal government according to loss level:
- Comprehensive cost level - producer, province & federal government share costs
- High cost level - producer, province & federal government share costs
- Catastrophic cost level - provincial & federal government ONLY

Note: admin expenses are shared by provincial & federal govt only

44
Q

What is the federal requirement for self-sustainability (statistical definition)?

A

For all base & adverse scenarios:
- Calculate the 95th percentile deficit of the fund balance at the end of the 6th year
- Rerun the scenario with that starting point
Then the program is self-sustainable if deficit recovery occurs:
- Within 15 years on average, and
- Within 25 years with 80% probability

45
Q

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

A

LOAD BASIS = selected target surplus level, and can be expressed in different ways:
- $ value
- % of liability dollars
- multiple of premiums
- percentile over a given time horizon

46
Q

What is the basis for the self-sustainability test? (Length of the financial position projection)

A

Test basis: 25-yr fully stochastic simulation of financial position

47
Q

What is the source of volatility in stochastic simulations of self-sustainability?

A
  • Mainly the indemnity component
    • Because the probable yield & premium rate methodologies are designed to avoid large year-to-year variations
48
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

49
Q

Actuary - identify adverse scenarios relevant to self-sustainability in agri-insurance (6)

A
  • Increase in liabilities (increases maximum exposure)
  • Decrease in liabilities (this can be severe when surplus vulnerable after CAT since future premiums are lower & deficit recovery takes longer)
  • Adverse claims experience
  • Introduction of new insurance plan
  • Deterioration in market value of investments
  • Combination of the above scenarios
50
Q

Test - compare agricultural self-sustainability to FCT (Similarity, Difference)

A

Similarity: both consider base & adverse scenarios
Differences: agricultural self-sustainability uses a fully stochastic simulation over a longer time horizon

51
Q

Is Govt reinsurance for agri-insurance considered traditional reinsurance?

A

No, it’s an optional deficit-financing scheme
- Province may finance deficits as they occur versus regularly contributing to a govt reinsurance fund

52
Q

Describe the funding mechanism for govt reinsurance for agri-insurance

A
  • Provincial producer programs contribute a % of premium to provincial & federal reinsurance
  • Amount is based on surplus position & risk profile
  • Must self-sustain for 25 years
53
Q

What triggers government reinsurance for an agri-insurance program?

A

When surplus of the production insurance fund is depleted
- Note that indemnities net of private insurance are paid out of production insurance fund first

54
Q

Identify the roles & responsibilities of the federal government in agri-insurance programs

A
  • Pay a portion of premium & administrative costs
  • Approve the provincial programs to ensure consistency
55
Q

Identify the roles & responsibilities of the provincial government in agri-insurance programs

A
  • Determine probable yield, appropriate premium rate
  • Responsible for claims handling process
56
Q

Identify the roles & responsibilities of producers in agri-insurance programs

A
  • Pay their share of the premium
  • Manage their crop adequately, and as per any requirement of their insurance policy
57
Q

Identify the roles & reponsibilities of private insurance in agri-insurance programs

A

Private insurance: provides coverage for producer for perils not covered under government insurance (ex: spot-loss hail coverages to produces)

Reinsurance: provides reinsurance for government insurance

58
Q

Evaluate the government agricultural insurance program using the criteria from the Government Insurer’s study note

A

Welfare or insurance?
- Insurance because producers pay premiums and government pays covered losses

Efficient?
- Yes, because government uses existing infrastructure and doesn’t make a profit

Necessary?
- Yes because farmers rely on the income stability the government program provides

59
Q

Compare the different triggers for:
(1) Actuarial Certification
(2) Historical Adjustments to Probable Yield
(3) Risk Transfer Test

A

Actuarial Certification:
- significant changes in program design or methods
- new crops
Historical Adjustments to Probable Yield:
- 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 within their life cycle)
- quality variation of crop from year-to-year (due to insured perils or other cause)
Risk Transfer Test:
- inception of contract
- when contract change significantly alters expected future cash flows

60
Q

Examples of areas where Actuarial Certifications are required (4)

A
  • Agricultural Insurance Production Programs
  • Risk Transfer analysis
  • Valuation of reserves
  • Rate Filings (certain aspects)
61
Q

Examples of areas where Transition rules are used (2)

A

Agricultural Insurance - Probable Yield calculation:
- After a new methodology is introduced
- Use “transition rules” or “stabilizing methods” to prevent sudden large changes

Rating:
- Prevents individual policyholders from getting a big rate change all at once

62
Q

Examples of areas where stochastic models are used

A

Agricultual Insurance (fully stochastic simulations are used)
- for adverse scenarios in self-sustainability model

FCT scenarios
- when risk distribution is easily inferred

MfADs
- where the cost distribution is skewed, and deterministic methods may not work well

Exam 6C - Fall 2023 (56 decks)

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