What is deficit means in self sustainability definition?

Battleacts2Battleacts2
in Chev.Agric

It says " For all scenarios with initial deficit=6th yr with 95% percentile, must recover deficit in 15 years on average, and recover deficit in 25 years with 80% probability. What is "Initial deficit" mean here? Does deficit mean Liability>Asset in balance sheet, or loss&Expense>income in income statement?

Comments

  • grahamgraham

    Agri-insurance in Canada is non-profit and the goal is to charge risk-based rates that also include an uncertainty load (or risk margin) and a self-sustainability load. This is to ensure the program maintains a surplus. A surplus is basically money in the bank that the program can use to pay farmers when the farmers suffer an insurable loss.

    A deficit occurs when the agri-insurance program doesn't have enough money to pay farmers. They then have to borrow or otherwise get the money from somewhere else. This deficit must then be recovered through charging higher future rates. (It doesn't refer to liabilities or assets on an insurer's balance sheet.)

    The source text doesn't go into a lot of detail about the initial deficit=6th yr with 95% percentile but here's what they say:

    • Self-sustainability is tested using a 25-yr stochastic simulation.
    • This simulation runs several different adverse scenarios and starts with a specified surplus.
    • At the end of each year in the simulation, a loss distribution is generated and there is a new value for surplus (or deficit, if negative) for each point in the loss distribution.
    • The initial deficit is defined to be the surplus/deficit corresponding to the 95th percentile of the loss distribution at year 6.

    You then rerun the simulation for each adverse scenario, but the new starting value is this initial deficit. The program is considered self-sustainable if these 2 conditions are satisfied:

    • recovery from this 95th percentile deficit within 15 years on average
    • recovery from this 95th percentile deficit within 25 years with 80% probability

    The term recovery means that the deficit has been eliminated and the surplus is greater than or equal to 0.

  • Tony88passTony88pass
    edited October 2024

    Hi Graham,

    Following your interpretation above for the surplus, can you pls further explain how the Gov RI program works? Since it says the province may finance deficits as they occur VERSUS regularly contributing to a govt reinsurance fund, does this mean province "borrow" money from gov RI pool to fund deficit, and later they will add this as RI load in rates to be able to pay back to the pool as "premium"?

  • grahamgraham

    The government reinsurance (Gov RI) program helps provinces cover deficits when their agricultural insurance funds run out. Provinces can either:

    • Borrow funds when needed from the Gov RI pool to cover shortfalls, then repay by charging higher premiums in the future (adding a reinsurance load).
    • Contribute regularly to a reinsurance fund to build up reserves for future losses.

    If they borrow, they repay by slightly raising premiums over time. The federal government usually covers 75% of the deficit, and the province covers 25%. This ensures the insurance program stays financially stable after big losses​

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