Alberta farmers will see a 20 per cent cut to crop insurance premiums this year — and if all goes well, those savings could continue over the next five years.
“We’re providing a premium break right now that will lower the cost to producers in the program — (but) even doing that, we still find ourselves in a position where we can cover the loss should we have a significant wreck,” said Darryl Kay, CEO of Agriculture Financial Services Corporation (AFSC).
“As we move into a better position financially, we have to look at different ways to make sure that producer premiums are fair, so we’re excited to be able to offer this.
“By giving back 20 per cent this year — and we’re really hoping to do that over the next five years — it will really make a difference for producers and help them with cash flow.”
The cut in premiums will save farmers more than $55 million total for their AgriInsurance crop insurance premiums in 2021. For a 2,000-acre farm, that’s about an $8,000 premium reduction, although that will vary “pretty significantly” depending on the insurance endorsements they add on.
And the crop insurer has enough in the bank right now to cover five years of discounts at that level, said Kay.
“We build up a reserve fund balance when we collect more premiums than we pay out in claims. That’s the position we find ourselves in now.”
The 20 per cent reduction, if maintained, means AFSC will forgo the equivalent of one full year of insurance premiums over the next five years.
The reserve fund is designed to collect premiums and pay out to producers in the event of a claim. Some years — as was the case in 2016, 2018, and 2019 — there’s enough in the fund for smaller one-off premium discounts (nine per cent in 2019, for example).
But a decade of decent profitability in Alberta’s crop sector — and very few major payouts — has allowed the insurer to build up a substantial surplus. AFSC now deems there’s enough to cover that one full year of insurance premiums while still maintaining some reserves against 2002-size losses. (That year, crop insurance payments topped out at record-high levels of $790 million in Alberta, nearly 400 per cent of premiums paid.)
“When we looked at the fund balance, we knew we could sustain years like that,” said Kay. “So we determined there’s an opportunity here, over a five-year period, to reduce the fund balance by approximately one year of premiums. That’s why we’re doing a 20 per cent reduction over five years.”
But that doesn’t necessarily mean that AFSC has been overcharging on its insurance premiums, he added. Those premiums are actuarially certified regularly, and when setting premiums, AFSC takes a 25-year approach to reduce risk.
“It’s that balancing act between making sure we’re setting premiums at a fair level but protecting that fund balance to make sure that the funds are there to pay future claims,” he said.
It also doesn’t mean that this premium discount is a sure thing over the next five years.
AFSC will still need to review its reserve fund position from year to year, and if there is a disaster that finds producers making significant claims, the discount will have to be revisited, said Kay.
“We know that we’ve collected more premium over the last decade than we’ve paid out in claims,” he said. “At the same time, we really want to make sure that we have that balance there so that, when producers need it, it’s there to pay claims.
“Should we have a wreck year, it’s important that we maintain a balance for that.”
That’s the position that livestock producers in Alberta find themselves in, he added. As a result, they’re not likely to see a discount on their livestock price insurance premiums (though perennial insurance for hay, silage, and pasture is covered under the crop insurance discount).
“If you look at Western Livestock Price Insurance, we’ve paid out a lot of claims over the last few years to livestock producers — over $125 million,” said Kay. “That’s far in excess of the premium we’ve collected on that fund.
“So it’s a little bit of a different financial position, and we’re not in a spot on Western Livestock Price Insurance where we can offer discounts. But we’re excited we can offer this on perennial insurance, and we encourage livestock producers to take advantage.”
Business risk management review
But the insurer, a provincial Crown corporation, is in the process of “actively reviewing the business risk management suite to make sure it’s working for producers,” said Kay.
“We recognize that there’s significant advancements in things like plant breeding, soil management, and on-farm technology. All of these things can change the risk profile of our insurance program,” he said.
“So we’re asking ourselves some questions around whether our assumptions are still valid and the program methodology is still fair. We try to factor all of those things into the equation when we set premiums for producers.”
One business risk management program that’s under scrutiny right now is AgriStability.
In November, federal Agriculture Minister Marie-Claude Bibeau proposed changes to the program that could increase payouts by 50 per cent. But the three Prairie provinces did not sign on, and at press time, none of the Prairie provinces had responded to the proposal ahead of the Jan. 31 deadline.
Instead, Alberta Agriculture and Forestry is working with the province’s commodity groups on a margin-based replacement for AgriStability. Should that move ahead, it likely won’t be in place until 2023, after the current Canadian Agricultural Partnership funding agreement comes to an end.
“We know that AgriStability isn’t an effective program for a number of producers. It struggles to meet producers’ needs, and we’ve seen participation drop,” said Kay. “So we’ve been challenged to take a longer-term approach and consider other programs that we could develop to replace AgriStability perhaps.
“We’re really looking for something that will be more equitable, more simple, more predictable, and more timely for producers.”
Kay hopes that, by improving its business risk management programs in general and reducing its premiums, AFSC can draw more producers back to the crop insurance program, which currently has a 72 per cent participation rate.
“Agriculture, as we all know, can be a really risky business. There’s so much that can impact a farming operation,” said Kay. “So I’m excited about the changes we’ve been able to announce to make this program more affordable. It’s really there to help them protect their farm against crop production losses, and this discount should make that more affordable.”