Premium cost sharing

FrancoisFrancois
in Chev.Agric

In the text, we find this sentence :

High cost share applies for risk-splitting benefits as well as for coverage levels above 80% for agricultural products that have premium costs greater than 9% of the production value.

I don't really understand the sentence.

Let's say we have high costs during the recent years, but it is not catastrophic. Percentile = 90

The premium related to the first 80 percent are split 40%/24%/36%. (Prod/Prov/Fed)
The premium related to the next 10 percent (up to our 90) are split 66.7%/13.3%/20%. (Prod/Prov/Fed)

What's the deal with "the premium costs greater than 9% of the production value" ? What is it related to ?

What are we to understand from the first part about risk-splitting ?

Thanks a lot

Comments

  • chrisboersmachrisboersma

    Optional benefits:

    Risk-splitting benefits, where indemnities may be based on a subset of the total farm production for a given agricultural product.

    Risk-splitting might split the farming operation into 4 field (not sure how this works in practice) if ONE has reduced production they would get a benefit (insurance claim) - even if offset by increased production in other fields (this would be nice for a LARGE farm operation). Government labels this coverage as "High Cost"

    What it's saying is where premiums are VERY high the producer pays MORE (a higher percentage) of said premiums:

    • risk splitting benefits
    • coverage levels > 80% where premium > 9% of production value

    So if they produce $1,000,000 (production value) of wheat and coverage costs $100,000 (or 10% of production value) for 80% limit coverage ($800,000 coverage level). The PRODUCER would pay 2/3rd of this cost ($66,700).. This "High Cost" category would encourage them to buy a LOWER limit over coverage (for example, a 70% limit @ $700,000 coverage level for $50,000 or 5%) and pay only 40% (Comprehensive Cost) of $20,000 .

    As long as it is below 80% (no matter how expensive) the government will cover 40% of the premiums. Some agricultural products could be quite expensive at a 90% coverage level and this rule would encourage reductions to 80% or 70% making the producer responsible for a larger percentage of any loss, especially on riskier products (they can cover these costs using other products like AgriInvest.

  • FrancoisFrancois

    @javid
    What is your take on this ?

    The first sentense of the paragraph on cost sharing mentions "portion of premium subject to catastrophic cost share" which leads me to believe that cost sharing is more about spliting the premium to correspond to the level of loss.

    What chrisboersma suggests is that if you end up in the High cost component, all the premium is subject to the 66.7% for the producers, which I'm not convinved. This also suggests that producers could "manipulate" their coverage level so they pay lower premims by not being in the high-cost strata.

    I see more this premium sharing as tax income

    I see it as

    Premiums at a level of 0-80 % are subject of a tax = 40%,
    Premiums at a level of 80-93 % are subject of a tax = 66.7% and
    Premiums at a level of 93+ % are subject of a tax = 0%

  • javidjavid

    Hi Francois,

    Each of "High-Cost", "Comprehensive-Cost" and "Catastrophic-Cost" are production coverages, with specified premium shares that Chris outlined above. Producers would make a selection of coverage level and that would determine the premium share % between producer/government/province. Definitely, they can choose a coverage level < 80% and it will result in a lower premium for the producer. Typically, most may choose between 70% and 80% for this reason. However, they will just have lower coverage as a result (that's just the tradeoff) and will have to pay more of the loss if it occurs.

    With respect to your initial questions, I'll reference the definitions from this site: http://publications.gc.ca/collections/collection_2010/agr/A34-10-3-2008-eng.pdf

    1. There is a High-Risk Agricultural Product, defined as "a commodity insured above the eighty percent (80%) Coverage Level, where the total pure Premium cost is greater than nine percent (9%) of the total Production Value." (page 67)
    2. There is also a Risk-splitting benefits, defined as "any Insurance Plan that triggers an indemnity payment without regard to the total production of the farm enterprise..." (full definition on page 64)
    3. The two items above fall under what is defined as High-cost Production Coverage (defined on page 65)

    With respect to that "9% rule", I cannot speak to where they got that from, and that may be beyond the scope of this exam.

  • AndrewLAndrewL

    Hi @graham, following-up on the above, are the calculations for premium share proposed by @chrisboersma accurate?

    Would not that give an incentive to max out coverage?
    That is take a coverage of >93% production.
    In that case, the insured has more coverage and premium share for producer=0%

  • Staff-T1Staff-T1
    edited August 2023

    I don't really agree with the posts above. My interpretation which is aligned with Francois is that the premium for losses in the layer 0-80% is covered by the government at 60%, premium in the layer 80-93% is covered by the government at 33% and the premium from 93-100% is covered 100% by the government. It is not a complete stepwise function as Chris mentioned above which would not make sense and would lead to the loophole you described. The source on page 13 mentions about catastrophic cost "In such instances, catastrophic cost share applies to the premium rate portion beyond the loss level determined to be the 93rd percentile" It says only the rate beyond the 93rd percentile is covered by the government. The penalization for increasing coverage is not as high as what Chris mentioned. If you select a coverage level of 85%, with 1M production value and costs 100K, then you would pay 0.4X0.8X100K + 0.67X0.05X100K = 35,350

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