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Each year, prices, coverage and premiums are updated using the actuarial guidelines established for the Crop Insurance Program. This ensures that the program remains financially sound, sustainable and therefore available for producers to manage their production risk in the future.
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Insurable Prices |
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The insured prices for the grains, oilseed and specialty crops are established on the basis of forecasts provided by the Market Analysis Division of Agriculture and Agri-Food Canada, in consultation with provincial market analysts. These forecasts represent the expected average farm gate price for the 2008-2009 crop year. Thus, prices are set based on the predicted average selling price of a given commodity from August 1, 2008 to July 31, 2009. The forecast prices for 2008 were based on analysis completed in mid-January of this year.
The setting of these prices takes into account World Weather in major grain producing regions, Pool Return Outlooks (PROs), carry-over stocks, expected demands and markets, grain futures pricing, currency exchange rates, and worldwide stock exchanges.
This same process has been used to determine insurable prices for the last twenty years. All of the Western Canadian provinces utilize the same group and processes of the Market Analysis Division of Agriculture and Agri-Food Canada to determine their insurable prices. Through different provincial insurance company timelines, these prices are finalized in different months. We realize some of the insurable prices may seem low this year, however, many grain prices have increased significantly since January and have never been this high in the past.
If you do not want to lock in your coverage on the basis of the fixed price, there is the alternative of selecting the Variable Price Option. The final prices for the Variable Price Option are established on the basis of July price forecasts for each crop. The variable price can increase or decrease by a maximum of 50 per cent in relation to the base price for the crop. You can also utilize the Contract Price Option for a select number of crops. If premiums are high, you may wish to select the Low Price Option which is set at 85 per cent of the base insurable price.
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Coverage Levels |
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Your dollar coverage is based on two elements: yield (bushel) coverage and insured price. Yield coverage is based on your long-term individual yield which is your farm’s individual production information and long-term area yields.
Customers may select coverage at 50, 60, 70 or 80 per cent of their average yield, cost shared at 60 per cent by governments, 40 per cent by producers. Coverage is only available to 70 per cent for the following crops: alfalfa seed, caraway, chickpeas, coriander, dry beans, Khorasan wheat,
potatoes, timothy hay and wild rice.
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Premiums and Cost Sharing |
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Crop Insurance sets premium rates with the goal of collecting the correct amount of premium to recover losses over the long term (claims paid) and to maintain a sustainable program by paying off program debt or building a reasonable reserve. The methodology used by Crop Insurance to calculate premium rates and yields must be certified by an actuary and approved by Agriculture and Agri-Food Canada every five years.
Premiums collected by Crop Insurance are used solely to pay claims. If there is excess premium once current year's claims are paid, the remainder is used to pay down debt from past claims, or to build a reserve to help service future claims, ensuring program sustainability over the long-term. Premium dollars are not used to pay for program administration. The full cost of program administration is cost shared by the federal and provincial governments.
Premium rates are updated annually on a crop and risk zone basis. Risk zone rates are based on the yield-loss claim payment history from 1973 to the present, specific to each crop and risk zone. There is a one-year lag in the information used; for example, 2008 premium rates use information up to 2006.
The claim payment history consists of the total claims paid and the total liability held by Crop Insurance for each year, crop and risk zone. A long-term “smoothed” average of the per cent of liability paid each year forms the basis of the premium rate for that crop and risk zone. This is the “base” premium rate which is a projection of future yield-loss claims, based on what has happened in the past.
This base premium rate then has loads added to it to collect additional premium to pay for program
features and benefits, and to repay program debt or build a reserve. Most loads are calculated based on what has happened in each risk zone. For example, risk zone-specific loads are added for the establishment and unseeded acreage benefits, based on the historical claims paid under these programs in each risk zone. A load is also added across the province to ensure program sustainability, by repaying program debt or building a reasonable reserve. The base rate plus various loads then gives the premium rate for the crop and risk zone.
The dollar per acre premium for a customer is calculated from the premium rate (for the selected
coverage level), the risk zone long-term average yield, the selected coverage level, the insured price for the crop, and the customer’s own experience discount or surcharge. The premium rate itself is, therefore, only one factor in the dollar per acre premium to the customer.
Finally, the customer pays only 40 per cent of the total premium amount, and the federal and
provincial governments pay the other 60 per cent. Premiums are charged on acres seeded to crops
selected for insurance. There is no charge for endorsing crops you do not grow.
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