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Objectives of the Agricultural Policy Framework (APF)
- protect producers' incomes from the vagaries of weather, pests, and global markets
- encourage risk mitigation strategies for emerging risk areas
- support growth, diversification, increased value-added activity in Canadian agriculture
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2 federal-provincial programs under APF
- Production Insurance (PI): manage production risks inherent to the industry
- Canadian Agricultural Income Stabilization (CAIS): mitigate unforeseen income disruptions as well as promote long-term income stability
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Programs differences:
- losses covered: PI covers uncontrollable production losses; it does not cover market price drops, fuel price increase, or other input costs
- CAIS takes these factors into account at the farm enterprise level
- under CAIS, PI payments are treated as farm income, and included in reference margin
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Production Insurance
PI minimizes income losses caused by natural hazards like drought, flood, wind, frost, excessive rain/heat, snow, as well as uncontrollable disease, insect infestations, wildlife damage
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Federal vs provincial
- constitutionally, insurance is a provincial responsibility
- provincial government agencies act as the insurer, delivering the plans to producers
- program is cost-shared among the government of Canada, government, producers
- governments contribute 2/3 to ensure it's universally available and affordable
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Other coverages offered:
- quality loss protection
- reseeding benefits: e.g. crop destroyed early in the season
- unseeded acreage benefits: e.g. excessive moisture during planting
- emergency work benefit: costs incurred to mitigate further damages
- perennial plant protection
- spot-loss peril protection for events such as hail causing damages readily discernible
- compensation to crops and livestock caused by wildlife
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Program design:
- participation is voluntary, however once a commodity is selected, all production of that commodity must be insured
- must buy insurance either before a commodity is planted or before any damage is possible
- production guarantee is generally established for each commodity based on area or normal or expected yield per unit, relative to previous production history
- historical average can be adjusted to accommodate latest trends, technological advances, buffering of abnormal yields
- government requires periodic independent actuarial certifications of all provincial methodologies used to establish protection levels to ensure they are reflective of the value of the commodity or the productive capability
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Levels of coverage
- coverage ranges from 50% to 90% of normal or expected yield (70-80% most popular)
- deductibles ensure that producers are always responsible for the first loss
- premiums are calculated on a provincial basis for each crop
- larger provinces calculate premium rates for smaller areas of homogeneous risk
- premium is based on the long-term risk of crop losses (15 to 25 years)
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Types of PI plans
- individual yield program: indemnify when total production of a crop is less than total production guarantee for the entire farm (low yields can be offset by other fields); cheaper because low yields in some fields can be offset by high yields in others.
- area-based or collective protection: average production is determined for a designated area. All producers in the area (irrespective of actual production) are compensated when the harvested yield for the area is below the production guarantee
- not based on yields: based on long-term loss level of the commodity
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Cost-sharing arrangements
- federal covers 60% for cat loss, 36% for COMP production, 20% for high cost production
- total government participation is about 62% of total premium costs
- both government levels are also responsible for all administrative costs (60:40)
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Role of Government of Canada
- approve provincial program proposals
- contribute a portion of the total premium and administrative costs
- develop national standards for maximum levels of coverage and benefits level
- provide reinsurance to provinces participating (AB, SK, MB, NB, NS)
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Role of Provincial Government
- pay a significant portion of the premiums and administrative costs
- design and develop insurance plans
- promote and sell PI programs
- underwrite PI policies, setting of yields, determine premium rates, collect premiums
- adjust and verify crop losses to determine claim amounts to be paid
- provide an appeal process for producers
- bear responsibility for deficit via loans or reinsurance
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Role of Canadian Producers
- participate in the PI program by paying a portion of total premium costs
- comply with insurance contract requirements
- manage their crops in a normal manner
- suggest program revisions to administrators
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Role of Private Insurance Companies
- not involved in the delivery, but some do:
- offer spot-loss hail and fire insurance for crops
- offer protection for greenhouse crops
- offer livestock mortality insurance
- some reinsurance companies provide reinsurance to provincial PI administrations
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Program performance
- over 350 PI plans are available for more than 100 different crops
- 50% of producers representing 65 to 70% of total crop acreage in Canada are insured
- 10 most frequently insured crops represent about 85% of the insurance program
- nationally, cumulative-loss-to-revenue ratio after 2003 is 0.99 (break-even)
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