AI Insurance: The Canadian Experience & Its Application to Egypt

Hotel Flamenco, CairoWednesday July 30th, 2008

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Key Messages1. Change traditional role of compensation2. Leverage funds – Compensation “and” not

Compensation “or”3. Separate business decisions from financing

decisions 4. Strategic Process – self discipline replaces

regulation

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Purpose

1. Relate Experience as AI Project Coordinator for NPG in Canada – Nature of interaction between public and private sector stakeholders

2. Discuss Thoughts on Contingency Fund Development & Insurance – Link(s) to biosecurity

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Objectives – For Today

1. Provide Context for AI Insurance Program/Policy Development

2. Discuss Typical Issues Faced When Developing Indemnification Tools For AI

3. Identify Actions Taken in Canada That Are Relevant To Egypt’s Industry

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What to ExpectWorkshop Format

• Two Hours Total

• Iterative & Interactive• Presentation – Discussion …..

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Agenda

Part 1: Putting the Problem in Context• The Canadian Experience• Gaps Identified• The Response

Part 2: Insurance Policy Development• Structured Risk Management• Specific Examples of Application

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The Canadian Poultry Industry

Meat Production Sector

Chicken National Agencies

Canadian Poultry Sector

Table Egg Production Sector

Turkey

Public Agencies

Canadian Food Inspection Agency

Agriculture and Agri-Food Canada

Breeder Growers

Broiler Growers

Health Canada

Canadian Poultry and Egg Processors Council

Further Poultry Processors Association of Canada

Public Health Agency of Canada

Public Safety and Emergency Preparedness Canada

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The HistoryAI and What Canada Learned

• Expensive - $380 Million Cdn

• Level of Preparedness – Industry & Public Agencies

• Interdependence of Stakeholders

• The Need for Strategic Approach – Structure, Agreements, Process

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Root of Problems

• Disease costs are concentrated while benefits of control are not! - How to motivate individual producers to act when they incur all costs and share the benefits?

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Obvious Conclusion

Current approach taken to address AI is not the most efficient nor effective way to go

• Reactive

• Does not motivate appropriate behavior

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The ResponseFormalized the Link Among National Feather

Agencies: (AI Project Coordinator) • Emergency Management

• Biosecurity

• Surveillance

• Disposal

• Compensation

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Results Achieved

• Every province has an Emerg. Plan• CFIA has a AI Hazard Specific Plan• NPG has a separate Emergency Plan• Biosecurity – added to OFFS• Active Surveillance in 2008 • Culling and disposal process •C&D process revised

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The Impacts/Benefits

• Fraser Valley 2004 - $380 million

• Yarrow 2005 - .2 million

• Regina Beach 2007 – limited to one farm 3 premises

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Lingering Problems

• Public Compensation Levels Inadequate• Long cycle vs. shorter cycle• C&D costs

• Initial Concerns re: Private Insurance • Little interest• Little/No understanding

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The Solution – Alternative Risk Transfer

• Industry driven with public agency involvement

• Proactive - approach re-insurance industry & work directly with them

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Alternative Risk Transfer –Principles

• Compensation is more than just disease recovery – Strategic

• Focus on the development of prevention based disease/farm management –biosecurity

• Tie levels of exposure and producer management to risk - surveillance

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Alternative Risk Transfer –Principles (cont’d)

• Reality of variable size, structure, and financial capacity among producers

• Address the public vs. private good & therefore responsibility

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Questions?

• Canadian Experience• Industry Actions Taken• Common Elements• Differences Faced• Specific elements of EP’s

Protocols etc…

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Part 2: Insurance Policy Development

1. What has to be done?2. Options for action?3. Role of the public?4. Examples of success.

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Insurance & Risk

“the premiums of the many pay for the losses of the few”

Dealing with Risk: 1. Avoid it - move2. Accept it – self insure or ignore3. Reduce it - biosecurity4. Transfer it - insurance

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Strategic Risk ManagmentUsing Insurance Principles

Private SectorNegotiations

Perils Identified

Develop Business Case

Confirm Option(s)

with Producers

Refinement of

Option(s)

Data Collection

Risk Control Process

Risk Assessment

Launch Solution

Consultation with Financial

Services Industry, Producers & Public Agencies

Data Analysis

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Step 1: Perils & Coverage Categories

1: Depopulation & Initial Movement Control•Market value loss – diff between market and compensation•C&D, PPE, & additional machinery•Overtime•Productivity

2: Dormant Period•Fixed Costs – building and equipment depreciation•Breech of Contract •Salary Maintenance•Composting

3: Repopulation Activities•Market and price loss •Replacement stock issues•Administrative losses

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Step 1 (cont’d) Perils & Risk Assessments

Compliance to industry’s own biosecurity standards •Membership status unknown

•Extracted biosecurity standards and rewrote as risk questions

•Questions and answers not weighted therefore results could be skewed

Farm processes & best practice risk benchmarks•Examining disease transmission routes not quality or welfare

•Establishing exposure to hazards from the risk carriers perspective therefore includes looking at

infrastructure

•Questions and answers are weighted therefore some farm processes more important than others

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Step 2: Data Collection – Potential for Infection

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Step 2 (cont’d): Possible Loss Scenarios

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Step 2 (cont’d): Actuarial Analysis

Estimated Extent of MPL Outbreak

Summary Model (By Category and Sector)

Actuarial Analysis And Premium Establishment Individual Policies

Specific Policy Wording: 1) Peril definition2) Coverage options3) Minimum Requirements4) Limitations 5) Exclusions

Administration FormatPolicy StructurePremium Payment/Pricing Structure

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Step 3: Assess OptionsCompensation Plan: an agreement between parties where one provides support to the other under specifically defined situations.Farmer levy Funding: On-going cash set aside in the event of a pre-defined situation.Bank Guarantee Funding: Obtaining a line of credit (vs. an actual pool) to be paid out in the event of a problem. Generallypaid back to the guarantor over a specified period of time.

Reciprocal: a contractual agreement through which subscribers share risks among themselves.

Insurance: a more restrictive formal structure providing financial coverage to address specified losses sustained by stakeholders resulting from stated perils.

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Step 3: Assess Options

Coverage may be offered by a number of agencies:

• Different agencies may select specific perils

• Cost sharing may occur among stakeholders

• Flexibility is key

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Step 3: Assess Options (cont’d)

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Step 3: Assess Options (cont’d)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30Farm

Ris

k Sc

ore

%

Risk Score %

75%

50%

100%

CompensationBands

Compulsory risk improvement

Offered risk improvement assistance

Rewarded through improved coverage

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Step 4: Negotiating the Solution

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Public Sector Role - PSRMPA publically - funded, five-year program

Addressed gaps in available risk management coverage

Two objectives:enhancing the ability of farmers to manage risks traditionally not covered by government programs or the private sector, and

increasing the participation of the private sector financial services industry in providing risk management to the agricultural sector

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Responding to Gaps in Private Sector Risk Management Tools

33

Producer (s)Organizations Donors/Public

Private Sector Insurance Industry

Consultations on potential projects, products and

services

Financial and technical assistance

Risk managementactivities and data

Risk managementproducts and services

Project applicationsand action plans

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Specific Examples

•S.e. Layers/Pre-lay/leghorn breeders

•S.e. Broiler Breeders

•AI Broilers/BB/Leghorns/Turkey

•Bluetongue for sheep – cross subsidy of premiums between cattle and sheep

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Example: Stakeholder RolesLayered Approach Segmented Approach

$100

$80

$20Self- Insurance - Deductible

Producer Groups in Conjunction with Regional Government in the Form of a Reciprocal

Re- Insurance Market

National or International Governments

Tot

al L

oss

$10

$100

$80

Self- Insurance - Deductible

Producer Groups in Conjunction with Regional Government in the Form of a Reciprocal

Re-Insurance Market

National or International Governments

Tot

al L

oss

$10

$100

$80

$20Self- Insurance - Deductible

Producer Groups in Conjunction with Regional Government in the Form of a Reciprocal

Re- Insurance Market

National or International Governments

Tot

al L

oss

$10

$100

$80

Self- Insurance - Deductible

Producer Groups in Conjunction with Regional Government in the Form of a Reciprocal

Re-Insurance Market

National or International Governments

Tot

al L

oss

$10

$100

$80

$20$10 Individual Producer Producer Group

Reciprocal

Re-Insurance Market

National Government

International Government

50100%

Coverage

Tot

al L

oss

$100

$80

$20$10 Individual Producer Producer Group

Reciprocal

Re-Insurance Market

National Government

International Government

50100%

Coverage

Tot

al L

oss

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Example: Process Options

CF3

BOD - CFO

CF2CF1 CF?

GM

CFO Admin

Compensation Fund

Advantages

•Quick to set up

•Control

Disadvantages

•Limited Funds

•No Leveraging of producer contributions

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Example: Process Options

CF3

BOD - CFO

GM

CFO Admin

Compensation Fund

BOD - Fund

Fund Manager

Fund Admin

Reinsurance

Advantages

•Provides access to additional coverage

•Leverages producer contributions

•Maintain control

Disadvantages

•No diversification of risk

CF2CF1 CF?

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Example: Process Options

BOD - Fund

ACP SCPCFOEtc

Advantages

•Shared administration costs

•Leverages producer contributions

•Maintain control of own pool

•Increase absolute coverage Fund Manager

Fund Administration

ACP Reinsurance

ACP Retention

SCP ReinsuranceSCP Retention

CFO Reinsurance

CFO Retention

Disadvantages

•Potential to reduce retention for individual agency if they are second to draw on funds

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Alternate Risk Management- Relevance to Egypt -

Structure to identify elements of common concern - strengthening the

interaction among stakeholders.

• Formal Structure/Approach

• Formal Agreements/Governance

• Increased Clarity

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Summary1. Change traditional role of compensation2. Leverage funds – Compensation “and” not

Compensation “or”3. Separate business decisions from financing

decisions 4. Strategic Process – self discipline replaces

regulation

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Questions?

1: What “costs” are incurred: • During the period of uncertainty?• During periods of infection?• During the recovery period?

2: How do these costs vary by stakeholder category?

3: Where would you spend your first pound to reduce risks?

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Questions?

• Peril Identification?• Who is the insured?• Dealing with Backyard flocks?• Interest of re-insurance?• Difficulties with HPAI vs LPAI?• Use of reciprocals vs. pure insurance?

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Questions?

• What 3 activities taken by Canadian producers would be possible for Egyptian producers?

• What makes them possible and what would limit the success of actions taken?