Canadian BRM: Private Firms, CrownCorporations, and Public Institutions

Alan P. Ker

Professor, Department of Food, Agricultural and Resource EconomicsDirector, Institute for the Advanced Study of Food and Agricultural Policy

November 2017

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Institute for the Advanced Study of Food and AgriculturalPolicy

Primary focus is attracting competent students to the food andagricultural sectors.

Secondary focus is informing policy by providing a conduit for foodand agricultural economics and policy research to industry andgovernment.

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Institute for the Advanced Study of Food and AgriculturalPolicy

weekly price forecasting (cattle, hogs, lambs, skim milkpowder) – primarily reduced form modelson-farm production efficiency bench-marking tool (dairy(Hailu), sheep)market models for “what-if” type questions (beef, dairy, hogs,and chicken)ConferencesFAREShare (newsletter) and FARETalk (podcast)

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My BRM Activities

Canadahired by provincial government to undertake an actuarial auditof AgriCorp

United Statesdesign rating methodology of yield and area-based productsexpert actuarial reviewer on numerous products (i.e.multi-year, tree, biofuel crops, etc.)standard reinsurance agreement

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Canadian BRM Institutions

Canada is relatively unique in that agricultural policy does notbelong exclusively to the federal government, they share thatwith provincial governmentsCanada has roughly five year policy frameworks much like theU.S. farm billnegotiated between the federal and provincial governmentsresembles the EU common agricultural policy in which thereare broad parameters and member states (provinces) designtheir own specific programscrown corporations administer business risk management inCanada

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Current BRM Programs

AgriInvest (small losses) - investment matchingAgriStability - net margin, tax, farm not commodity levelAgriInsurance - traditional crop insurance, 60% premiumsubsidyAgriRecovery (catastropic losses) - government triggeredfunded through a 60-40 split between federal and provincialgovernmentsBRM programs add unnecessary uncertaintyUS programs more lucrative; unit basis, max(E(P),HPO)supply managed commodities - dairy, chicken, eggs, turkey

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AgriStability

net-margin entire farm-based insurance with co-insuranceparticipation declining - main reason for review - cursoryadds uncertainty to producers through uncertainty ofpayments and uncertainty of timing of paymentsexplicitly reduces on-farm incentives to diversifyheavily subsidized on a percentage basis but generally NOTtrue on a $ basis especially under GF2commodity specific gross margin or revenue insurance wouldbe better option; maintain co-insurance

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AgriInsurance

commodity specific, multi-peril, CROPS onlyparticipation relatively high60% subsidized with a 60-40 federal-provincial splitfederal

approves rating methodologyprovides public reinsurance

provincesdesign and rateabsorb administrative and operating costsabsorb 100% of underwriting gains and losses

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Political Economy of BRM Programs

most countries political influence must be at federal level; inCanada both federal and provincial governments are subjectto rent seeking activities from agricultural interest groups

interest groups have easier access to provincial governmentsspatial concentration is greaterinterest groups and provinces are incentive compatible

significant provincial add-onsQuebec’s ASRA program ($900 deficit)Ontario’s Risk Management Program - working model ofAgriStability - gross margin by commodity

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Private Interests in Canadian BRM Programs

public crowding out of private insurance offerings; likely verylittle uptake when you consider return to capital, riskpremium, moral hazard and averse selection issues, andpolitical economy (government ad-hoc disaster aid)governments have natural endowments -- low cost of capital,risk neutrality, private information -- allows them to offerinsurance more efficiently than private companiesprovincial governments purchase private reinsurance against aportion of their book of business; extremely oddU.S. system has private/public insurance; restrictscross-compliance policy such as environmental incentives, etc.

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Crown Corporations: Deliver Agents of BRM Policy

Provincial Crown Corporations account for 98% of premiumsAlberta, Saskatchewan, Manitoba, Ontario, Quebec, andPrince Edward IslandCrown corporations are enterprises owned by the Crown in theright of a provinceestablished by an act of parliament and are shielded fromgovernment intervention and legislative oversightAlberta, Saskatchewan, Manitoba, Ontario and Prince EdwardIsland purchase private reinsurance: makes no sense

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Crown Corporations: Private Reinsurance

Private Re-insurance Premiums 2013-14British Columbia - $2.8 millionAlberta - $25.1 millionSaskatechewan - $19.5 millionManitoba $40.9 millionOntario $17.3 millionPrince Edward Island - $2.4 million

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Crown Corporations: Private Reinsurance

Private Reinsurance does not make economic sensegovernments are risk-neutral relative to their book of businessgovernments face risk in a number of sectors and thus canrisk pool and mitigateprobability of ruin is zero for governments in developedcountriescan deficit finance at relatively low ratesrisk premium in private market is upwards of 50%not aware of any government in a developed nationpurchasing private reinsurance for anything.FCC does not purchase private reinsurance

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Crown Corporations: Deliver Agents of BRM Policy

dichotomy within crown corporations between the roles andresponsibilities of a public program delivery agent versus thoseof a private insurance companyreserves in excess of $3.65 billionexpected number of years to depletion is greater than 1000yearsasymmetric loading in their premium structuresreserve fund targets are excessive even for private insurers

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Private OR Public Delivery of Agricultural Insurance

Premium Rates are comprised of:actuarially fair rate or expected lossreserve loadadministrative and operating expensesreturn to capitalrisk premium based on risk attitude of insurercost of reinsurance

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Joint Private AND Public Delivery of AgriculturalInsurance

US Program - reinsurance agreement between private and publicprivate requires a return to capital; asymmetric sharing ofunderwriting gains and lossesprivate requires risk premium; asymmetric sharing ofunderwriting gains and lossespayment for administrative and operating expenses

More generally

creates another rent-seeker; private insurerscross-compliance with private money

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Implications of BRM Subsidization: Canada 60%

governments subsidize to increase participation rates; mainlyto avoid ad-hoc disaster assistance (may be more costly)subsidies incentivizes producers to use less risk-reducingtechnologiesempirical exercise: are yield distributions changing throughtime consistent with producers utilizing risk-reducingtechnologies or are yield distributions changing through timeconsistent with producers using subsidized insurance as asubstitute for risk-reducing technologies?if producers are adopting risk-reducing technologies, mass inthe lower tail of the yield distribution would be shifted up tothe middle and upper tail of the yield distribution

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Winter Wheat

0 20 40 60 80 100 120

0.0

00.0

40.0

8

chatham−kent

Yield (bushel/acre)

Density

− 2010− 1990− 1970

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Winter Wheat

0 20 40 60 80 100 120

0.0

00.0

40.0

8

perth

Yield (bushel/acre)

Density

− 2010− 1990− 1970

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Corn

0 50 100 150 200

0.0

00.0

20.0

40.0

6

oxford

Yield (bushel/acre)

Density

− 2010

− 1990

− 1970

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Corn

0 50 100 150 200

0.0

00.0

20.0

40.0

6

huron

Yield (bushel/acre)

Density

− 2010

− 1990

− 1970

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Soybean

0 10 20 30 40 50 60

0.0

00.0

50.1

00.1

50.2

0

lambton

Yield (bushel/acre)

Density − 2010

− 1990

− 1970

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Soybean

0 10 20 30 40 50 60

0.0

00.0

40.0

80.1

2

essex

Yield (bushel/acre)

Density

− 2010− 1990− 1970

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Implications of BRM Subsidization: Findings

Across crops and regions, yield distributions are changing throughtime, consistent with producers using subsidized insurance as asubstitute for risk-reducing technologies. Most efficient response.

Given the availability of heavily subsidized multi-peril cropinsurance throughout the developed world, seed companies mayhave focused their research and development efforts on increasingexpected yields rather than improving downside yield resilience.

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Actuarial Soundness of AgriInsurance in light of ChangingClimate and Changing Technology

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Implications for Premium Rates: Corn

1980 1990 2000 2010 2020 2030 2040

0.0

0.5

1.0

1.5

2.0

huron

Year

Actu

ari

ally

Fair P

rem

ium

Rate

− Rate as a percent of gaurantee

− Rate as bushels per acre

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Implications for Premium Rates: Corn

1980 1990 2000 2010 2020 2030 2040

0.0

0.5

1.0

1.5

2.0

oxford

Year

Actu

ari

ally

Fair P

rem

ium

Rate

− Rate as a percent of gaurantee

− Rate as bushels per acre

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Solvency of Ontario’s AgriInsurance Program underChanging Climate

Simulated a number of scenarios plausible and less so.steadily increased the probability of a low yield outcomeincreased volatilitydecreased technological changeetc.

Essentially, because of the the experience-based rating system andhow quickly losses are dissolved into future rates, the program willmaintain its solvency.

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Yield Volatility and BRM Program Design

Bigger issue is the design of yield or revenue insurance thatprovides appropriate risk coverage without incentivizing on-farmadoption of risky practices. It can make economic sense forproducers to adopt high risk high reward technologies at theexpense of less risky technologies under subsidized crop insurance.Very very difficult to find the right balance.

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End

Thanks

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