modeling multiple peril crop insurance worldwide · 2017. 10. 20. · jack seaquist care seminar...

©2011 AIR WORLDWIDE CORPORATION 1

©2011 AIR WORLDWIDE CORPORATION

1

Modeling Multiple Peril Crop Insurance Worldwide

Jack SeaquistCARe Seminar C-7Philadelphia, PAJune 7, 2011

www.air-worldwide.com


2

AIR Agricultural Model Applications

AIR Agricultural Model for Crop Insurance and Reinsurance

Enterprise Risk

Management

Pricing &Actuarial

Claims

Sales and Producers

Risk Transfer

Underwriting

The AIR Agricultural Model for the Multiple Peril Crop Insurance is a state-of-the-art fully probabilistic model, accounting for:

� Changes in technology over time

� The evolution of crop insurance programs

� Commodity price volatility

� Weather impact



3

DAMAGE

Probabilistic Agricultural Model Components

HAZARD

FINANCIAL

Insured Loss Calculations

Policy Conditions

Government Reinsurance

Private Reinsurance

Crop Damage /

Yield Estimation

Crop Insurance Program

Exposure Information

Commodity Price Risk

Stochastic Event Set Catalog

AWI Weather Risk


4

DAMAGE

Probabilistic Agricultural Model Components

HAZARD

FINANCIAL

Insured Loss Calculations

Policy Conditions

Government Reinsurance

Private Reinsurance

Crop Damage /

Yield Estimation

Crop Insurance Program

Crop Requirements

Precipitation

Temperature

Terrain Elevation

Soil

Land Use Land Cover (Satellite)

Exposure Information

Commodity Price Risk

Stochastic Event Set Catalog

AWIWeather Risk

Historical Yields

Typhoon Catalog

Historical Prices



5

AWI (Agricultural Weather Index) is a Measure of Yield Variability Due To Weather

Daily Temperature Daily Precipitation

Available Water Capacity (Soil)Crop Specific Data

County-Specific AWI

Index


6

In a Normal Year Water Supply and Water Requirement s Are Balanced and AWI Indicates Positive Yield Outco me

Eva

potr

ansp

iratio

nR

unof

fS

oil M

oist

ure

Fav

orab

le f

or Y

ield

sD

etrim

enta

l to

Yie

lds

Apr May Jun Jul Aug Sep Apr May Jun Jul Aug Sep



7

In a Normal Year Water Supply and Water Requirement s Are Balanced and AWI Indicates Positive Yield Outco me

Eva

potr

ansp

iratio

nR

unof

fS

oil M

oist

ure

Fav

orab

le f

or Y

ield

sD

etrim

enta

l to

Yie

lds



8

In A Drought Year Water Requirements Exceed the Water Supply and AWI Indicates Plant Damage

Run

off

Eva

potr

ansp

iratio

nS

oil M

oist

ure

Fav

orab

le f

or Y

ield

sD

etrim

enta

l to

Yie

lds




9

AWI Measures County-level Crop Performance During the Season

AWI proportional

to flood damage

AWI indicates significant

drought damage

End of Season AWI estimates

yield variation from normal

AW

I

Calendar Days


10

1990 1995 2000 2005 2010

8010

012

014

016

018

020

0

x

y

20081990 1995 2000 2005 2010

8010

012

014

016

018

020

0

x

y

20081990 1995 2000 2005 2010

8010

012

014

016

018

020

0

x

y

2008

AWI Removes Weather Variability from the Historic Yields to Reveal True Technology Trend

Yield Time Series

Trend Line Influenced by Weather Variability

True Technology Trend with Weather Variability Removed

17 Bushels

Yie

ld -

Bus

hels

/Acr

e



11

The Choice of Methodology Can Have a Large Impact on Insurance Contracts

Probability Density Function of Detrended Yield Time Series

100 150 200 250

0.00

00.

005

0.01

00.

015

Without AWI With AWI

100 150 200 250

0.00

00.

005

0.01

00.

015

100 150 200 250

0.00

00.

005

0.01

00.

015

100 150 200 250

0.00

00.

005

0.01

00.

015

Yield – Bushels/Acre

Pro

babi

lity

Yield Guarantee

100 150 200 250


12

In The US Model AWI Technology Adjusts Historic Tim e Series of County Level Yields to Current Production Levels

• The catalogue is based on spatially correlated county level yield distributions

• All weather events are summarized by the final modeled harvest yield

• 10,000 outcomes based on variation from historical data

• Current technology level

• Not biased by recent event years



13

The Price Risk Component Takes Into Account Correla tions Between Total US Production and Harvest Price

40%

60%

80%

100%

120%

140%

160%

180%

60% 70% 80% 90% 100% 110% 120% 130%

CORN - PRICE RATIOStochastic Catalog Historical

19831988

1993

HarvestPrice

2010

2008

Yield - % of Normal


14

New SRA Reduced the Overall Profitability of the In dustry and Increased Protection for Catastrophic Events

0

100

200

Average 2 years(Median)

10 yr (10%) 20 yr (5%) 50 yr (2%) 100 yr (1%) 500 yr(0.2%)

Loss

Rat

io

Return Period

Old SRANew SRA

1003% 4%

1%0%

-1%-3%

-6%



15

Impact of 2011 SRA Change - Illinois

0

100

200


10 yr (10%) 20 yr (5%) 50 yr (2%) 100 yr (1%) 500 yr(0.2%)

Loss

Rat

io

Return Period

Old SRANew SRA

11%

7%

8%

3%

1%

-2%

16%

100


16

Impact of 2011 SRA Change - Iowa

0

100

200


10 yr (10%) 20 yr (5%) 50 yr (2%) 100 yr (1%) 500 yr(0.2%)

Loss

Rat

io

Return Period

Old SRANew SRA

12%

4%

5%

0%-1%

-3%

19%

100



17

Impact of 2011 SRA Change – North Dakota

0

100

200


10 yr (10%) 20 yr (5%) 50 yr (2%) 100 yr (1%) 500 yr(0.2%)

Loss

Rat

io

Return Period

Old SRANew SRA

-2%

-2%

-7%-12%

-14%-18%

-1%100


18

Impact of 2011 SRA Change - Texas

0

100

200


10 yr (10%) 20 yr (5%) 50 yr (2%) 100 yr (1%) 500 yr(0.2%)

Loss

Rat

io

Return Period

Old SRANew SRA

-2%

0% 0%0% -1% -3%

-4%100



19

New 2011 SRA Fund Allocation Rules

35% minimum

Total Net Retained Premium

Retained Premium

Ceded to Government

Assigned Risk Fund (by State)

Commercial Fund* (by State)

Minimum of 25% of premium

in each State

Policies

20%

Maximum of 75% of

premium in each State

+

=

* No more sub-funds (Cat/Buy/Rev)


20

Fund Allocation Process with AIR MPCI Model

AIR MPCI Model Catalog

Probability of Loss

Probability of Loss Distributions

for Each Policy Bundle

-- State, County, Crop, Insurance Plan, Coverage Level

Allocate to Funds

Alternative Retention

Levels

Calculate Pre-SRA and Post-SRA

Loss Distributions

Allocation Strategies

Policy Records

State-Level Fund Limits



21

Crop Insurers’ SRA Fund Allocation Strategies Great ly Impact Reinsurer Risk

-80%

-60%

-40%

-20%

0%

20%

40%

60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Gai

n -

% o

f P

rem

ium

s

Probability

Gain/Loss Excedence Probability Comparison

(percentage of premium)

A

B

C

D

E

Median


22

China Crop Insurance Program Covers Cost of Production Rather than the Value of the Crop

• Separate programs by province• Perils covered and policy terms vary by crop and province• Named perils might include

– Rainstorm, flood, windstorm, hail, waterlog, drought, frost, diseases, insect pests, tornado, mud-rock flow, landslide, low temperature

• Indemnity varies by plant growing stage• Losses shared and limited by governments



23

AWI (Agricultural Weather Index) is a Measure of Crop Damage Due to Weather

Daily Temperature Daily Precipitation Available Water Capacity (Soil)

Crop Specific Data

AWI

Land Use Land Cover Terrain Elevation


24

A Comprehensive Approach Captures Flood Losses from Multiple Sources

Low

Risk

High

Risk

Locally Excessive Moisture

Snowmelt

Typhoon

Derived from historical years 1980-present

Derived from Asia-Pacific Typhoon model

AW

I –

Soi

l M

oist

ure

AW

I –

Run

off



25

Higher Resolution Damage Estimates Based on AWI Are Validated against Province Level Losses

High Resolution Crop Mask

Losses for 2007 Drought by Province

Accumulated Effects

AWI Model for Local Effects

Wet

Dry

Damage to

Crops on Local

Level

Wet

Dry


26

Closing Thought – What if the 1993 Flood Happened in 2011?

1993 Corn Yield

(Percent of Expected Value)

State

Actual 1993

RMA Gross

Loss Ratios

AIR Modeled

(Recasted)

Gross

Loss Ratios

AIR Modeled

(Recasted)

Post-SRA

Loss Ratios

Iowa 465% 247% 168%

Illinois 63% 21% 66%

Indiana 55% 22% 67%

Ohio 91% 54% 61%

Minnesota 610% 214% 161%

Nebraska 188% 80% 83%

US Total 219% 106% 97%

Key Differences Between 1993 Flood and 2011 Flood: Timing, Location, Policy Mix, Premium Rates, SRA Program Terms

modeling multiple peril crop insurance worldwide · 2017. 10. 20. · jack seaquist care seminar...

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