Accumulation Concentration of similar risks in a particular area such that an insured event may result in several losses at the same time.
Actuarial Branch of statistics dealing with the probability of an event occurring. Accurate actuarial calculations require basic data over a sufficient time period to permit the likelihood of future events to be predicted with a degree of certainty.
Additional coverage – A level of coverage greater than catastrophic risk protection.
Ad Hoc Response – Relief arranged in the aftermath of a disaster. Ad hoc responses are generally less efficient than planned responses or a well-designed risk management framework.
Administrative fee – A fee in addition to premium that insured must pay for insurance for each insurance year.
Adverse Selection – Situation in which potential insurance purchasers know more about their risks than the insurer does, leading to participation by high-risk individuals and nonparticipation by low-risk individuals. Insurers react by charging higher premiums or not insuring at all.
Agricultural Insurance – Insurance applied to crops, livestock, aquaculture, and forestry. Buildings and equipment are not usually covered by agricultural insurance, although they may be insured by the same insurer under a different policy.
Annual crop – An agricultural commodity that normally must be planted each year.
Application – The form required to be completed by insured and accepted by insurer before insurance coverage will commence. This form must be completed and filed in agent’s office not later than the sales closing date of the initial insurance year for each crop for which insurance coverage is requested. If cancellation or termination of insurance coverage occurs for any reason, including but not limited to indebtedness, suspension, debarment, disqualification, cancellation by insured or insurer, a new application must be filed for the crop.
Area-based Index Insurance – Insurance contracts written against specific perils or events defined and recorded at a regional level (county or district in the case of yields, local weather station in the case of insured weather events). Indemnities are paid based on losses at the regional rather than farm level.
Area – Land surrounding the insured acreage with geographic characteristics, topography, soil types and climatic conditions similar to the insured acreage.
Asymmetric Information – Information imbalance that occurs when one party to a transaction possesses more or better information than the other. Buyers of insurance products typically have better information about their level of risk exposure, which they may hide from insurers in order to obtain lower premium rates.
Basis Risk – Risk that index measurements will not match individual losses. As the geographical area covered by the index increases, basis risk increases as well.
Buffer zone – A parcel of land, as designated in organic plan, that separates agricultural commodities grown under organic practices from agricultural commodities grown under non-organic practices, and used to minimize the possibility of unintended contact by prohibited substances or organisms.
Cancellation date – The date specified in the actuarial documents on which coverage will automatically renew unless canceled in writing by either insured or insurer or terminated in accordance with the policy terms.
Capacity – Maximum amount of insurance or reinsurance that an insurer, reinsurer, or insurance market will accept.
Catastrophe – Severe, usually sudden, disaster that results in heavy losses.
Ceding Company – Direct insurer that places all or part of an original risk on a reinsurer.
Certificate – With respect to organic crops, a written document that identifies the name of the person certified, effective date of certification, certificate number, types of products certified, and name and address of the certifying agency. Claim – An insurer’s application for indemnity payment after a covered loss occurs.
Cognitive Failure – Failure of decision makers to correctly assess the possibility of infrequent catastrophic risks.
Coinsurance – 1. Situation in which the insured is liable for part of every loss, often expressed as a percentage of the sum insured. 2. Situation in which each of several insurers covers part of a risk.
Collective Policy – Policy issued on behalf of a number of insurers or covering a number of items, each insured separately. Combined
Loss Ratio – Proportion of claims paid (or payable) plus administrative and operating expenses (A&O) to premiums earned. A combined loss ratio greater than 1 (or 100 percent) indicates that the premiums collected from the insured are not sufficient to pay the claim (indemnity) and cover A&O expenses (that is, the insurer faces an underwriting loss).
Commission – Proportion of the premium paid by the insurer to the agent for procuring and serving the policyholder. Contract change date – The date by which changes to the policy, if any, will be made available.
Cooperative Extension System – A nationwide network consisting of a state office located at each state’s land-grant university, and local or regional offices. These offices are staffed by one or more agricultural experts, who work in cooperation with the National institute of Food and Agriculture, and who provide information to agricultural producers and others.
Correlated Risks – Risks that are likely to affect many individuals or households at the same time. For example, coffee growers in the same community are likely to be simultaneously affected by a decrease in the price of coffee.
Country Risk Profile – Level of risk exposure of a country, determined by the occurrence of events such as price shocks and adverse weather events that affect major private and public assets and economic activities within a country at the micro, meso, and macro levels.
Crop Insurance – Insurance that provides financial compensation for production or revenue losses resulting from specified or multiple perils, such as hail, windstorm, fire, or flood. Most crop insurance pays for the loss of physical production or yield. Coverage is also often available for loss of the productive asset, such as trees in the case of fruit crops.
Crop Year – The time period from one year’s harvest to the next for an agricultural commodity. The crop year varies for each commodity. The crop year has an influence on the price of a commodity, since the quality of the harvest may differ from year to year, depending on weather conditions and other factors.
Declared Acres – Means all acres seeded or intended to be seeded to an annual crop in the current Crop Year that the Insured reports on the Insurer.
Deductible – Amount of a claim the insured has to bear, expressed as a percentage of the sum insured or as a fixed amount.
Direct Premium Subsidy – Subsidy calculated as a percentage of the insurance premium paid. Such a subsidy is problematic because it disproportionately benefits high-risk farmers who pay higher premiums. Attracting higher-risk farmers can significantly increase the costs of insurance.
Disaster-index Insurance – Insurance contract in which payments are triggered by extreme weather events. Disaster-index insurance is a form of weather insurance. See also Index Insurance and Weather Index Insurance.
Double crop – Producing two or more crops for harvest on the same acreage in the same crop year.
Earliest planting date – The earliest date insured may plant an insured agricultural commodity and qualify for a replanting payment.
Ex Ante Risk Mechanism – Risk management action taken before a potential risk event occurs.
Excess-of-loss – Form of reinsurance under which recoveries are due when given loss exceeds ceding company’s retention defined in agreement.
Ex Post Risk Mechanism – Risk management action developed in reaction to an event.
Exposure – Amount (sum insured) exposed to insured perils at any one time. In crop insurance, exposure may increase and then decrease during the coverage period, following the growth stages of the crop from planting to harvest.
Final planting date – The date by which the crop must initially be planted in order to be insured for the full production guarantee or amount of insurance per acre.
Gross Net Premium Income – Gross written premium of a primary insurer minus cancellations, refunds, and reinsurance premium paid to other reinsurers. See also Original Gross Premium and Producer Premium. Harvesting Allowance – Means any additional
Indemnity to cover harvesting costs as calculated by the licensed processor and agreed to by the processor, the Alberta Vegetable Growers (Processing), Canada, and AFSC.
Hazard – physical or moral feature that increases the potential for a loss arising from an insured peril or the degree of damage.
High-probability Low-consequence Events – Frequent risks that cause mild to moderate damage. Insurance products are seldom offered for such events, because the transactions costs associated with them make the insurance cost-prohibitive for most potential purchasers. The high transactions costs partly reflect information asymmetries that cause moral hazard and adverse selection. See also Adverse Selection and Moral Hazard.
Indemnity – The amount the insurer pays the insured, in the form of cash, repair, replacement, or reinstatement, in the event of an insured loss. The indemnity cannot exceed the actual value of the asset insured just before the loss. For many crops, an escalating indemnity level is often established as the growing season progresses.
Index Insurance – Insurance that makes indemnity payments based not on an assessment of the policyholder’s individual loss but rather on measures of an index that is assumed to proxy actual losses. See also Area-based Index Insurance and Weather-index Insurance.
Informational Constraint – Constraint imposed by limited access to or availability of reliable data.
Inspection Report – Report that contains the inspection details from which the loss assessment will be determined.
Institutional Risk – Risk generated by unexpected changes in regulations, especially in import and export regimes, that affect producers’ activities and profits.
Insurability – Conditions that determine the viability of insurance as a method of managing a particular risk.
Insurable Interest – Interest that exists when an insured derives a financial benefit from the continuous existence of the insured object or suffers a financial loss from the loss of the insured object.
Insurance Agent – Person who solicits, negotiates, or implements insurance contracts on behalf of the insurer.
Insurance Broker – Person who represents the insured in finding an insurer or insurers for a risk and negotiating the terms of the insurance contract. A broker may also act as an agent (for the insurer) for the purposes of delivering a policy to and collecting premiums from the insured.
Insurance Policy – Formal document (including all clauses, riders, and endorsements) that expresses the terms, exceptions, and conditions of the contract of insurance between the insurer and the insured.
Insured Peril – Cause of loss stated in the policy, which on its occurrence entitles the insured to make a claim.
Insured – Means an individual; or partnership; or joint venture; or corporation engaged in the business of growing and harvesting a crop.
Layer – Range of potential loss covered by insurance. See also Risk Layering.
Loss Adjustment – Determination of the extent of damage resulting from the occurrence of an insured peril and the settlement of the claim.
Loss Ratio – Proportion of claims paid (or payable) to premiums earned, usually expressed as the total gross claim or indemnity divided by the total or original gross premium, expressed as a ratio or percentage. A loss ratio greater than 1 (or 100 percent) indicates that the amount of the claim (indemnity) paid by the insurer exceeds the amount of the premiums collected from the insured (inclusive of premium subsidy). See also Producer Loss Ratio and Combined Loss Ratio.
Low-probability High-consequence Events – Events that occur infrequently but cause substantial damage. Decision-makers, including agricultural producers, tend to underestimate their exposure to such events, because they forget the severity of the loss experienced during infrequent extreme weather events. For this reason, an insurance product that protects against these losses is frequently discounted or ignored by producers trying to determine the value of an insurance contract. See also Cognitive Failure.
Market Failure – Inability of a market to provide certain goods at the optimal level because market prices are not equal to the social opportunity costs of resources. The high cost of financing catastrophic disaster risk prohibits most private insurance companies from covering this risk, resulting in market failure.
Moral Hazard – Problems generated when the insured’s behavior can influence the extent of damage that qualifies for insurance payouts. Examples of moral hazard are carelessness and irresponsibility.
Non-proportional Treaty Reinsurance – Agreement in which the reinsurer agrees to pay all losses that exceed a specified limit arising from an insured portfolio of business. The limit, which is set by the reinsurer, may be monetary (for example, excess of loss) or a percentage of original gross premiums (for example, stop loss). The rates charged by the reinsurer are calculated independently of the original rates for the insurance charged to the insured.
Notice of loss – A written notice insured is required to file in his agent’s office whenever he initially discovers that his allowable revenue for the insurance year may be less than his insured revenue.
Original Gross Premium – Amount payable by the insured to the original insurer, including the technical premium, to cover expected losses and catastrophe losses plus commercial loadings to cover marketing and acquisition costs, administration and operating expenses, and profit margin.
Perennial crop – A plant, bush, tree or vine crop that has a life span of more than one year.
Premium – Monetary sum payable by the insured to the insurers for the period (or term) of insurance granted by the policy; the premium rate x the amount of the insurance; the cost of an option contract paid by the buyer to the seller. See also Original Gross Premium.
Premium billing date – The earliest date upon which the insured will be billed for insurance. The premium billing date is contained in the actuarial documents.
Premium Rate – Price per unit of insurance, normally expressed as a percentage of the sum insured.
Premium Subsidy – Amount of the total premium paid by the government or a third party.
Producer Loss Ratio – Proportion of claims paid (or payable) by the insured that is net of the premium subsidy paid by the government.
Producer Premium – Amount of the total premium paid by the insured following deduction of the subsidized proportion of premium.
Probable Maximum Loss – Largest loss believed possible for a certain type of business in a defined return period, such as 100 or 250 years.
Proportional Treaty Reinsurance – Agreement in which the insurer agrees to cede and the reinsurer agrees to accept a proportional share of all reinsurances offered within the limits of a treaty, as specified on the slip. Limits can be monetary, geographical, by branch, by class of business, or by some other measure. Reinsurers are obliged to accept all good and bad risks that fall within the scope of the treaty.
Quota Share Treaty Reinsurance – Agreement in which the ceding company is bound to cede and the reinsurer is bound to accept a fixed proportion of every risk accepted by the ceding company. The reinsurer shares proportionally in all losses and receives the same proportion of all premiums as the insurer, less commission. A quota share often specifies a monetary limit over which the reinsurer will not be committed on any one risk (for example, 70 percent of each risk, not to exceed $700,000 any one risk).
Rapid-onset Shock – Sudden shock, such as a flood, hurricane, frost, freeze, storm, or large change in a commodity price.
Rate on Line – Rate of premium for a reinsurance contract that, if applied to the reinsurer’s liability, will result in an annual premium sufficient to meet expected losses over a number of years.
Regulatory Risk – Risk generated by unexpected changes in regulations, especially in import and export regimes, that affect producers’ activities and profits.
Reinsurance – Insurance of insurance, used to smooth an insurance company’s income over time, limit its exposure to individual risks and restrict losses, and increase its solvency margin (percent of capital and reserves to net premium income).
Replanting – Performing the cultural practices necessary to prepare the land and then replacing the seed or plants of the damaged or destroyed commodity on the same acreage.
Revenue protection – A plan of insurance that provides protection against loss of revenue due to a production loss, price decline or increase, or a combination of both. If the harvest price exclusion is elected, the insurance coverage provides protection only against loss of revenue due to a production loss, price decline, or a combination of both.
Risk Aggregation – Process of creating a risk-sharing arrangement that pools risks, thereby reducing transactions costs and giving small households or other participants a stronger bargaining position.
Risk Assessment – Qualitative and quantitative evaluation of risk. The process includes describing potential adverse effects, evaluating the magnitude of each risk, estimating potential exposure to the risk, estimating the range of likely effects given the likely exposures, and assessing uncertainties.
Risk Coping – Strategies employed to cope with a shock after it occurs. Examples of risk-coping strategies include selling assets, seeking additional employment, and applying for social assistance.
Risk Financing – Process of managing risk and the consequences of residual risk through products such as insurance contracts, catastrophe bonds, reinsurance, and options.
Risk Layering – Process of separating risk into tiers in order to finance and manage risk efficiently. Individuals can retain small but recurrent losses, which can be managed through risk mitigation techniques and self-insurance. More severe but less frequent losses can be transferred to cooperative/mutual insurance schemes, commercial insurers, and reinsurers. Governments often assume responsibility after major disasters, acting as reinsurers of last resort and providing post-disaster aid.
Risk Management – Actions—including physical mechanisms (spraying a crop against aphids, using hail netting, planting windbreaks) and financial mechanisms (hedging, insurance, self-insurance)—taken to prevent or reduce losses caused by undesirable events.
Risk Mitigation – Actions taken to reduce the probability or impact of a risk event or exposure to risk events.
Risk Pooling – Aggregation of individual risks for the purpose of managing the consequences of independent risks. Pooling large numbers of homogenous, independent exposure units can produce an average loss that is close to the expected loss. It provides a statistically accurate prediction of future losses and helps determine premium rates.
Risk Retention – Process in which a party holds on to the financial responsibility for loss in the event of a shock.
Risk Transfer – Process of shifting the burden of financial loss or responsibility for risk financing to another party, through insurance, reinsurance, legislation, or other means.
Sales closing date – The date contained in the actuarial documents by which an application must be filed and the last date by which insured may change his coverage for an insurance year.
Slip – Document, usually prepared by a broker and submitted to underwriters, outlining the terms and conditions of an insurance proposal.
Slow-onset Shock – Shock, such as drought, that unfolds slowly and whose impact is difficult to assess or may not be recognized until high losses are incurred.
Social Safety Net – Various services, usually provided by the government, designed to prevent individuals or households from falling below a certain level of poverty. Such services include free or subsidized health care, child care, housing, and food as well as cash payments to people in need.
Spot Loss – Losses eligible for Indemnity on the actual area of a crop damaged by an incidence of hail, fire by lightning or accidental fire.
Stop-loss Treaty Reinsurance – Policy that covers claims once they exceed a certain amount. A policy with a stop-loss provision is a nonproportional type of reinsurance, in which the reinsurer agrees to pay the reinsured for losses that exceed a specified limit arising from any risk or any one event. For example, a reinsurer may agree to pay claims of $200,000 in excess of $100,000. If the claims are more than $300,000, the reinsured (that is, the insurer) will have to bear the remainder of the claims or make additional financing arrangements to cover the remaining risk exposure.
Stubble acreage – Means acreage that has been in crop or has not been properly summer fallowed during the year preceding the year in which the insurance is in effect.
Summerfallow acreage – Means acreage that did not produce a crop, and on which an adequate and accepted method of weed and other plant growth control was practiced.
Total coverage – Means the total guaranteed production in kilograms or in tonnes of the insured crop as determined by the insurer and as set out in the regulations.
Transactions Costs – Costs, including the cost and time spent obtaining information, required to engage in an economic exchange. Transactions costs in insurance include those associated with underwriting, contract design, rate-making, adverse selection, and moral hazard.
Underwrite – To select or rate risks for insurance purposes. Void – When the policy is considered not to have existed for an insurance year.
Weather Index Insurance – Contingent claims contracts for which payouts are determined by an objective weather parameter (such as rainfall, temperature, or soil moisture) that is highly correlated with farm-level yields or revenue out- comes. See also Index Insurance.
Wildlife – Means any animal that has not been held in captivity, and includes birds.
Yield Risk – Risk associated with the inability of an agricultural producer to predict the volume of output a production process will yield, because of external factors such as weather, pests, and diseases.