Climate change: challenges and opportunities for crop insurance in Canada

By Rémi Villeneuve, FCIA, FSA

The pandemic we have just come out of reminded us of the importance of maintaining robust food sovereignty in our country, provinces and cities. That said, the ability to produce basic food in a given region requires a resilient, diversified agri-food industry. Few realize that one of the most effective tools to ensure food sovereignty, while helping our farmers confront extreme weather events and maintain their farms’ financial viability, is the crop insurance program.

Also known as the AgriInsurance Program, Canada’s crop insurance is a federal-provincial program that insures producers’ expected agricultural output. We should mention right off the bat that crop insurance is not an insurance product subject to insurance law. Rather, it is a government program with the same features as an insurance product.

Administration and funding

Agriculture is a shared jurisdiction between the federal and provincial governments under the Canadian constitution, so each level of government has a specific role to play to ensure the program runs smoothly.

Provincial governments, by way of Crown corporations in eight of the ten provinces,[1] deliver the program locally, from underwriting through to claims payment. They also calculate the insured production, which is to say the expected output after a deductible is applied, as well as the insurance premium; both are based on certified actuarial methodologies.

Changes made to the program in each of the provinces arise from discussions and negotiations between producer associations and the provincial program administrator. The provincial governments subsidize 24% of the pure premium and 40% of the administrative costs, in addition to covering some or all of the annual deficits when payouts surpass insurance funds.

“As mandated by the federal government, Agriculture and Agri-Food Canada subsidizes 36% of the pure premium and 60% of the administrative costs.”

It also sees to it that the insurance programs are sufficiently funded and offer insurance coverages consistent with producers’ production capacities by establishing strict guidelines on rating, expected yields and the programs’ financial autonomy.

In addition, the federal government advises administrators on the prices for which agricultural products could be insured, as well as partially financing program deficits for provinces interested in reinsurance through a federal-provincial reinsurance program.

Despite their differing roles, the two levels of government share the same objective: to ensure the largest possible participation in the crop insurance program to support the industry’s financial viability as well as to minimize the need for ad hoc government intervention in the event of a natural disaster when insurance coverage or program participation would be insufficient.

Encouraging participation in the program

There are three essential criteria in the crop insurance program to encourage participation:

  1. Affordability: Certain agricultural sectors have slim profit margins, and were it not for subsidies, agricultural insurance could consume a large share of these margins. Since producers pay only 40% of the pure premium, crop insurance is a cost-effective risk management tool; indeed, it can actually be seen as an investment. Like most of the countries of the Organisation for Economic Co-operation and Development, Canada has seen its crop insurance program’s participation rate increase significantly with the subsidy rate, with membership now reaching just under 75%.
  2. Rapid response: The program must respond as soon as producers need it. Payments for production loss coverage occur right after the loss is observed in the fields and when the agricultural product would be sold. As such, in part, the payout replaces the proceeds from the sale at harvest time.
  3. Alignment between production and production capacity: This criterion is by far the most important. To maintain confidence in the program, producers must believe that the expected production assigned to them matches their own expected agricultural production, under normal climate conditions. This is precisely where the program’s largest challenge lies: coming up with a precise, yet slightly conservative, evaluation of the expected yield.

Addressing insurance coverage issues

Some would believe that a producer’s expected annual yield would simply be based on calculating the average historical yield observed, but this approach could create a number of issues:

  1. A multi-year history would bring stability to the expected yield and to insurance coverage, but it would take a lot of time to recognize new crop practices. In recent years, the introduction of plants that are more resistant to drought and the optimal use of fertilizer have led to significant increases in agricultural yields.

    Conversely, a shorter yield history would make it possible to quickly recognize exceptional yields but, at the same time, would bring a great deal of variability to insurance coverage. This would be counterintuitive because, in theory, production capacity varies little from one year to the next if the climate is stable. We will return to this point later on. It is in this balance that the challenge lies: use enough of production history to provide stable coverage, but not too much to be able to reflect any increase in production capacity as quickly as possible.

  2. Certain agricultural yields show a statistically significant upward trend, but applying these trend factors poses its own share of challenges: should they be applied to all producers or just those who have adopted the new crop practices?

    Not all producers employ new crop practices at the same pace, which poses a dilemma for the administrator: increase all participants’ expected yield by a little or apply a larger increase to the expected yield of those who are changing their production methods more quickly.

    If crop insurance were a private product, the second option would be a no-brainer, if only from a marketing point of view. But in a public system with one delivery agent in each province, the administrator might not prioritize collecting this crucial information to personalize insurance coverage.

  3. Other situations can also make things more complicated, such as the absence of history for new producers. In this case, they could either take over the history of the previous agricultural land owner or be assigned the regional average. Either option could lead to over- or under-insurance, depending on the context. In some cases, the administrator can also use credibility standards to blend a shorter history with a regional or provincial average.

For all these reasons, the expected yield methodologies undergo an actuarial valuation every five years, in which the actuary issues a professional opinion stipulating that the methodology employed adequately covers:

  • the treatment of historical yields;
  • the trend factors for these historical yields;
  • the credibility of yields deemed insufficient to evaluate the expected production; and
  • the match between production capacities and expected yields, consistent with the guidelines established by the federal government.

Although the financial affordability of the crop insurance program is an essential component to ensure sustained participation, the actuary must ensure that the premiums charged are sufficient to cover payouts over a long period. Therefore, any changes requested by producers and approved by administrators that modify indemnity payments require the premiums to be adjusted accordingly.

Rating issues

As in the case with expected yields, the rating methodology is also subject to an actuarial opinion every five years to confirm that the premiums are sufficient over the long term and that the rating methodology conforms to the federal government’s guidelines.

“Once again, the fragile balance between rating stability and its capacity to adjust to changes in risk is subject to increased scrutiny. It may be tempting to distribute catastrophic losses over a long period, or over a number of crops, but such an approach could mask the risk inherent in cultivating the agricultural products in question and, in so doing, undermine producers’ ability to adjust to the new risks.”

Chief among these new risks faced by farmers is climate change, which has a direct and immediate impact on all aspects of the program. Expected yields tend to increase not only due to advances in agronomy that enhance crop resilience to drought stress but also due to the longer growing season (which starts earlier and ends later). In addition, certain agricultural products will be able to grow in new regions that, until now, did not have enough “degree days” or suitable climate conditions. However, this increase in expected production might be accompanied by greater yield variability, which would have a direct impact on payouts and premiums.

The assumption that the climate conditions observed in the past will recur in the future, which expected yields and claim benefits are based on, must be completely revisited. As a matter of fact, Agriculture and Agri-Food Canada is looking into the possibility of simulating agricultural yields and claim payouts based on climate scenarios. This could potentially limit the use of historical payouts in future calculations.

This approach poses challenges that, until very recently, seemed unsurmountable – establish a mathematical function between the following meteorological parameters and agricultural yield:

  • ground moisture after the spring thaw
  • seasonal precipitation
  • degree days
  • frosts
  • hail
  • etc.

With climate simulations, the administrator would be able to apply a mathematical function to climate parameters to estimate yield levels, yield variability, insurance claim payouts and, thus, premiums. This approach could help the rating actuary verify whether historical losses remain relevant and, if not, opt for a new type of rating – one that is no longer deterministic but rather a product of stochastic climate modelling derived from scientifically recognized climate scenarios. 

Consequently, climate change could force the crop insurance program to switch from the current approach, which consists solely of evaluating the program’s resilience to new climate risks, to a brand- new rating methodology.

Individualizing the program

The rise in crop insurance premiums, caused in part by climate change and by the rise in value of farm commodities generated by a sustained increase in global demand, will increase in turn the pressure on administrators to offer a more individualized, and thus more precise, underwriting and rating process.

Producers who improve their resilience to climate change by using recognized production methods, such as cover crops that improve the organic content of the soil and, by extension, resistance to drought, should see an immediate decrease in their premiums and potentially a higher expected yield. The same is true for producers opting for apple varieties with shorter growing periods (thereby making the apples less susceptible to early or late frosts), or for those who take the initiative to diversify the risk for their farming as a whole by producing an increased number of crops.

However, this new, more individualized and proactive, underwriting and rating process will require provincial administrators to significantly upgrade their IT systems to support the collection of new data.


Agricultural insurance is an essential tool for maintaining the financial health of the agricultural sector and strong food sovereignty. The systemic risks inherent in this industry and the potentially high insurance cost requires governments to encourage the highest possible level of participation in the program at the most reasonable cost for producers and taxpayers.

Actuaries practising in agricultural insurance are aware that climate change is threatening the fragile balance between the stability and reactivity of expected yields and premiums, and they are calling into question the currently used rating methodologies. The use of climate scenarios may make it possible to innovate and evolve toward dynamic rating more in line with climatology than with historical payouts.

Despite the challenges climate change poses, it provides the administrators the opportunity to be proactive and to recognize producers’ crop practices and resilience efforts in a more timely fashion. These will be reflected more in their coverage and their insurance premiums, in hopes that this greater equity will help maintain, or even increase, participation in the program.

About the author

Rémi Villeneuve, FCIA, FSA, is Chief Actuary of Agriculture and Agri-Food Canada and Director of its Production Insurance and Risk Management Division.

The opinions expressed by the author do not necessarily reflect the position of Agriculture and Agri-Food Canada or of the Canadian Institute of Actuaries.

[1] The crop insurance program in British Columbia and New Brunswick is administered by their respective department of agriculture.

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