All About AgriInsurance
No matter how well one may plan in advance, there is simply no way to guarantee that an agricultural based business will generate a certain level of income every year. Which is why most businesses in the agricultural sector purchase a special type of insurance known as AgriInsurance. Let us tell you a little more about AgriInsurance.
What is Agri Insurance?
AgriInsurance protects producers from yield reductions and crop losses caused by factors beyond their control such as adverse weather, disease, wildlife and insect infestations. The indemnity payment to producers aims to provide some certainty in their farming operation.
The design and offering of a specific AgriInsurance product will vary from province to province. Plans are built specifically for each crop and premiums also vary based on a variety of factors such as the risk involved, and the coverage offered.
AgriInsurance is backed by both the provincial and federal government, but managed on a provincial level. The provinces must continually work to improve AgriInsurance in order to adapt to changing technology, weather patterns and industry or regulatory requirements.
This means that each province can create its own rules, regulations, and policies when it comes to offering an AgriInsurance policy. Having said that, in order to secure federal funding to subsidize premiums, certain guidelines and criteria must be met.
Because there is so much to consider when offering a new insurance plan or modifying an existing one, provincial programs or producer associations may need actuarial expertise. Axxima is knowledgeable about AgriInsurance and offers consulting advice to support program development.
What Does AgriInsurance Cover?
AgriInsurance can cover variance in crop yields due to happenings of nature, as well as losses in production quality. There are many things that can affect crops, and natural hazards are difficult to predict. AgriInsurance fills this deficit ensuring a producer is able to have a somewhat stable income year after year, even if something happens which is outside of their control. Here are some examples of what AgriInsurance covers.
- Crop loss due to drought
- Crop loss due to disease
- Crop loss due to natural disasters
- Crop loss due to fire
- Crop loss due to insect damage
The coverages included in AgriInsurance can be adjusted to suit the needs of your province. If your province is in an area prone to certain natural disasters, such as drought, hail, or fire, you should ensure these are included in your plans.
What Doesn’t Agri Insurance Cover?
Agri insurance is designed to cover unexpected or unforeseen circumstances. It is not, however, designed to cover on-going issues that may cause a loss of crops, or issues which arise due to farmer neglect or improper management practices. Below is a list of the situations which are generally not covered by Agri insurance.
- Loss of harvest due to equipment damage
- Damage due to improper pesticide usage
- Damage due to failure to follow good farming practices
Why is it Important to Have Agri Insurance?
There are numerous ways a natural disaster could affect a business. Just look at the 2021 year, in which droughts swept through Canada causing farms to produce 26% less crops than they normally would. Without Agri insurance, these farmers would experience a loss of over 25% of their income—all because of a lack of rain which they can’t control.
This lack of rain came shortly after the 2020 year in which farmers found themselves unable to harvest because of the labor shortage due to foreign laborers returning to their country as a result of COVID-19. Because they were unable to harvest in time, many farmers lost a percentage of their crops which went bad in the field.
These combined unforeseen events cost the agricultural sector millions of dollars, most of which would have never been recovered by the farmers had it not been for the government-backed AgriInsurance plans that the farmers had protected themselves with in advance.
Because this kind of protection and help is so critical to those who are growing the food to feed the country, the government has a vested interest in keeping AgriInsurance programs in top shape.
How Does Agri Insurance Coverage Work?
First of all, most AgriInsurance insurance policies are yield-based, meaning applicants must have an accurate prediction of their probable yield for the year. This number must be obtained by a program administrator, and the policy will then be provided based on this assessment.
Periodically, program managers or provinces must certify to the federal government that the probable yield offered is actuarially sound and obtain an actuarial certification of the probable yield methodology used for each insurance plan.
The coverage then offered is called the production guarantee and is calculated as follows:
Production Guarantee = Unit of Exposure x Probable Yield x Coverage Level
When applying for AgriInsurance, applicants will need to provide both the unit of exposure, as well as their desired coverage level, which acts similar to an insurance deductible. The unit of exposure is typically the number of acres. The coverage level will vary based on the producer’s risk tolerance and the plan offering. Most plans vary from 60% to 90% coverage level. If a producer selects a 90% coverage level, this means if they would retain the first 10% any yield decline as a deductible, with an indemnity payment of up to 90% of their insured production in the event of a yield decline. In the extreme case of a total loss, the producer would receive 90% of their insured production in claim payments.
Two other actuarial certifications are also required by the federal government to subsize the insurance program: one for the premium methodologies and one assessing the self-sustainability of the program. The actuarial certification of the premium rate methodologies requires an opinion stating that the premium rate methodologies are determined in an actuarially sound manner. The objective of this requirement is that premiums charged be reflective of the plans’ expected loss potential. The actuarial certification of self-sustainability requires an opinion stating that the insurance program is able to recover from a catastrophe in a timely manner.
Axxima is well versed in AgriInsurance plan design and required actuarial certifications that meets the federal government guidelines.
What About Other Insurance Programs Like AgriInsurance?
Many producer groups or associations also envision potential stabilization funds, margin insurance coverage, income insurance coverage or other products which could fill a certain need in the industry. Axxima has worked with various groups to assist with program design, pricing and sustainability.