ANNEX

I. List of References

Cottle, Phil. 2001. Forestry Insurance and Marketing in 2001, Paper presented at Partnerre International Agricultural Insurance Seminar 2001, Diessenhofen, Switzerland.

Dismukes, R. 2002. Crop Insurance in the United States, Paper presented at conference in Madrid, May 2002.

Eaton, C & Shepherd, A. 2001. Contract Farming, Partnerships for Growth, FAO, Rome.

FAO. 1991. A Compendium of Crop Insurance Programmes.

FAO. 1991. Loss Adjustment Training Modules, Vols. 1 & 2.

European Union. 2001. Agriculture Directorate General, Risk Management Tools for E.U. Agriculture; with special focus on insurance.

Hazell, P. 2001. Potential Role for Insurance in Managing Catastrophic Risk in Developing Countries, IFPRI Occasional Paper.

MunichRe. 1999. Topics - Annual Review of Natural Catastrophes, 1998, MunichRe. Munich.

Roberts R.A.J. & Dick W.J.A. 1991. Strategies for Crop Insurance Planning, FAO, Rome.

Skees J. et al. 2001. Developing Rainfall-based Index Insurance in Morocco, Washington World Bank.

UNEP/WMO. 2001. United Nations Environmental Programme/World Meteorological organization Inter-Governmental Working Panel on Climate Change, Climate Change 2001: Impacts, Adaptation and Vulnerability.

II. Note on Premium Calculations

A premium payment must cover a number of costs. These are expressed as a percentage of the sum insured. Insurance is very much a data-driven business, and as such careful records are kept of costs of all types. Some costs can be estimated with a great deal of accuracy. These include;

• internal administrative costs, office premises, staff, equipment and running costs;

• external administrative costs, mostly associated with the acquisition of clients, i.e. advertising, farmer education etc.

Other costs are not so readily estimated, especially in the early years of a given insurance product. These are the costs of meeting claims. The term for this is ‘loss cost’, and is the sum of indemnities plus adjustment expenses, divided by the total sum insured. Historic data is the basis for the calculation. Naturally in a new programme this base figure can only be an estimate, based on loss histories for similar ranges of perils in equivalent agricultural areas.^[37] The base figure is then adjusted by the addition of ‘loadings’. These are sums which insurers need to set aside for factors which can increase the likelihood and/or the size of claims under the policy, or the costs of mitigating fluctuations through the purchase of reinsurance. In crop and forestry insurance these factors are:

• Catastrophe loading: to make prior allowance for the incidence of perils which have a very low frequency, but which are marked by high severity, that is, they are potentially very damaging and therefore very costly for insurers involved. An example would be the Munich hail storm of July 1984 (see Footnote 21 above);

• volatility loading: to make prior allowance for marked changes in the type and frequency of perils;

III. Glossary of Common Insurance Terms

Accumulation

The concentration of similar risks in a particular area such that an insured event may result in several losses occurring at the same time. Monitoring accumulation risk is an important part of insurance company management.

Act of God

An event arising from natural causes without human intervention and which could not have been prevented through reasonable care or foresight, e.g. floods, earthquakes, windstorm.

Actuarial

Describes the calculations made by an actuary. Essentially this is a branch of statistics, dealing with the probabilities of an event occurring. Actuarial calculations, if they are to be at all accurate, require basic data over a sufficient time period to permit likelihood of future events to be predicted with a degree of certainty.

Actuary

A person with a mathematical and statistical background who is responsible for the application of probability and statistical concepts to insurance aspects such as rating, premium, reserves and dividend calculations.

Adverse selection

The tendency of individuals with poorer-than-average risks to buy and maintain insurance. Adverse selection arises when insureds select only those coverages which are most likely to result in losses. In agricultural insurance, this can arise when:

• high-risk farmers or farmers using backward practices participate, while other farmers, with more certain production expectations, do not;

• farmers apply for insurance only on their high-risk crops or plots, withholding other units. An example would be buying insurance only for crops grown on flood-prone areas of a particular property.

Agricultural insurance

Insurance applied to agricultural enterprises. Types of business include: crop insurance, livestock insurance, aquacultural insurance and forestry insurance, but normally exclude building and equipment insurance although these may be insured by the same insurer under a different policy (see “Aquacultural insurance”, “Crop insurance”, “Forestry insurance”, “Livestock insurance”).

All risk insurance

A term used to describe a policy which covers the insured property against any fortuitous cause including acts of God, accident, disease, fire, theft and pilferages. In agricultural insurance, all risk policies may cover all weather risks, fire, theft etc. It excludes those perils defined as exclusions in the policy and inevitabilities such as wear and tear or depreciation. Typically such policies are yield-based, rather than damage-based, i.e. loss assessment following an insured event centres on measuring the yield against a pre-determined, historic yield expectation.

Anti-selection

Same as adverse selection.

Aquacultural insurance

Protection for fresh water or salt water fish farming enterprises against mortality to fish stocks. This is distinct from insurance which may be contracted against risks to cages and other structures from storms, marine accidents etc., though in individual cases the policies may be linked.

Arbitration clause

A provision in a policy stating that any differences between the insurer and the insured shall be settled by arbitration. Each party shall appoint an arbitrator and these shall select a neutral umpire.

Area approach (area-yield basis)

An agriculturally homogeneous area may be insured as one unit, or form the basis for standardizing loss assessments across the area. This unit may comprise several blocks of land farmed by the same farmer or different farms farmed by different farmers. For loss adjustment, in this approach, the actual average yield is assessed by sample survey through crop cutting or other methods, and compared with the normal (insured) yield. The average yield loss is applied to all land of all insured farmers within the defined area, disregarding individual differences in actual damage and crop yield. The aim of this approach is speed and cost-containment.

Assessor

A person appointed to assess and settle any claim made under an insurance policy. (see loss adjustor).

Assurance

Same as insurance. Usually applied to life and marine policies and not to agricultural insurance.

Attachment

The commencement of an insurance policy i.e. start of insurance coverage.

Automatic insurance cover

A grower participating in a bulk marketing operation, or contract farming situation may be covered automatically by a crop insurance policy which is arranged by the crop marketing agency, or crop buyer/processor. This type of arrangement conveys considerable cost economies since the expenses of marketing the insurance, collecting premiums and issuing policies are minimized.

Average

If the property value has been under-insured, then the insured’s claim for a loss is reduced proportionately to the undervaluation. This is a basic principle of insurance contracts.

Basis of evaluation

The basis on which the potential insured property is valued, the established value being used to determine the Total Sum Insured. In crop insurance policies, often the basis of valuation is the production cost of growing the crop.

Basis risk

This is the potential mismatch between insurance payout and actual insurance losses.

Blanket policy

Apolicy in which a single sum insured covers a number of individual items, for example, several buildings in a fire policy, or a glasshouse plus its contents, including crops and production equipment.

Bonus

(See no claims bonus).

Bordereau

There are two types of bordereau, one for premiums and one showing details of losses. Both are submitted to insurers/reinsurers at regular intervals. 1) The premium bordereau gives details of the insureds, sums insured, location of risks and premium rates. 2) The loss bordereau provides such details as date of occurrence of insured peril, date and amount of claim, amounts paid and amounts outstanding.

Burning cost

Burning cost is a term used in excess of loss reinsurance to describe the amount of claims paid above the excess level, expressed as a percentage of the total premium.

Business interruption insurance

The insurance of losses resulting from unforeseen circumstances which reduce the output, both physical and financial, of a business. Business interruption policies may be used for the insurance of agricultural processors, and may cover, for example, additional expenses resulting from any shortfall in delivery to the processing plant of the crop to be processed.

Capacity

The maximum amount of insurance or reinsurance that the insurer, reinsurer or insurance market will accept.

Captive insurance company

This is an insurance company established and owned by a large conglomerate, or commercial group, or by trade, professional and other associations. It writes the insurance business of its parent company or of its affiliates/members.

Catastrophe

A severe, sudden and unexpected disaster which results in heavy losses.

Cede

To purchase reinsurance.

Ceding company

A direct insurer who places all or part of an original risk on a reinsurer.

Claim

The application for indemnity (payment) after an insured event has occurred.

Compulsory Scheme

Any form of insurance required by law. In agricultural insurance this relates to a scheme which has the legislative authority to compel participation by farmers growing crops or owning livestock covered by the scheme. (See also “voluntary scheme” and “automatic insurance”.)

Consequential loss insurance

Insurance against monetary loss other than material damage caused by the insured peril(s). This type of policy is often applied to irrigated agriculture, where cover is purchased against loss or damage to the crop consequent to breakdown of irrigation equipment, leading to loss of ability to irrigate the crop.

Constructive total loss

When the insured property has been damaged to such an extent that it is uneconomic to salvage it, a constructive total loss may be declared. A constructive total loss is not the same as an actual total loss, in which the insured property is totally destroyed. In crop insurance, a constructive total loss may be declared when damage levels exceed a pre-determined percentage of the crop making it uneconomical to harvest the remaining crop, i.e. harvest costs are greater than the value of the undamaged crop which would result from the harvesting operation.

Coupon insurance

Sometimes used in reference to what is more correctly known as index insurance. In index insurance a simple coupon replaces an insurance policy. (See “Index insurance”.)

Crop credit insurance

In crop credit insurance the coverage is based on the amount of the production loan for individual farmers. Often the premium is paid by the lender, and any indemnity goes first to that lender so that in the event of a crop loss from an insured event the loan is extinguished and the borrower is left with no further obligation, for this loan, to the bank.

Crop insurance

Provides protection against loss or damage to growing crops including perennial crops such as tree crops against specified or multiple perils, e.g. hail, windstorm, fire, flood. Measurement of loss could be by “yield” basis, production costs basis, agreed value basis or rehabilitation costs basis. While most crop insurance is geared towards loss of physical production or yield, cover may also be provided to loss of the productive asset, such as trees.

Cyclone

Areas of low pressure around which wind blows clockwise in the southern hemisphere and anticlockwise in the northern hemisphere. The terms “hurricane” and “typhoon” are regional names for a strong “tropical cyclone”, with “hurricane” used in the North Atlantic and “typhoon” used in the Pacific Ocean. All originate in tropical or sub-tropical waters, and have sustained wind speeds in excess of 119 km. per hour.

Deductible (Excess)

An amount representing the first part of a claim which an insured has to bear as stated in the policy. The deductible is usually expressed as a percentage of the sum insured, but equally may be a monetary amount.

Drought

This is a peril which farmers often request for inclusion in a crop insurance policy, but it is also one of the most difficult perils to insure because of the problems of its definition, isolation and measurement of effects on crop production. In contrast to most weather perils, drought is a progressive phenomenon, in terms of an accumulating soil moisture deficit for plant growth, and its impact on crop production and yields is often extremely difficult to predict, then measure and isolate from other non insured causes. Because of these difficulties much attention has been given in recent years to imaginative approaches to dealing with this problem (see “Index insurance”).

Earned premium

Premium is said to be earned once the insurance has expired.

Excess

Same as deductible.

Excess of loss policy

This term, usually applied to re-insurance business, refers to a policy that covers claims once they have exceeded a certain amount. Here it is a nonproportional type of reinsurance, where the reinsurer agrees to pay the reinsured losses which exceed a specified limit arising from any risk or any one event. A reinsurer may decline to limit his exposure by setting an upper limit above which he will not pay claims. For example, a reinsurer may agree to pay claims of US$200 000 in excess of US$100 000. If the claims are more than US$300 000, the reinsured (i.e. the insurer) will have to bear the remainder of the claims. Alternatively, he may take out further excess of loss reinsurance with other reinsurers until the total sum insured of the original risk is covered.

Excess rain

Definitions of this peril vary widely, but generally relate to abnormally high rainfall intensities over short periods of time which cause direct physical damage to crops (lodging, shedding of grain etc.) and this may extend to secondary losses caused by saturation of soil, and chlorosis and necrosis of plants. Some policies also provide protection against excess rain at the time of harvest which prevents access to fields in order to carry out the harvest operations in a timely fashion, resulting in yield loss and/or a reduction in quality.

Excessive heat

Excess heat caused by high temperatures which may cause severe damage or loss in crops, such as at the pollination stage when excess heat will inhibit seed set. Because of difficulties in isolating and measuring losses due to this peril it is seldom accepted by crop insurers.

Experience rating

Rating the risk using the insured’s own loss/accident history and not taking into consideration general market loss ratios and rates.

Facultative reinsurance

This is reinsurance by offer and acceptance of individual risks (as opposed to clustered or grouped risks - see “Treaty reinsurance”). In facultative reinsurance contracts the reinsurer retains the “faculty” to accept or reject a particular risk offered by the ceding company. The method has the advantage that the ceding company can select which individual risks to reinsure, while the reinsurer can exercise his underwriting judgement on a case by case basis. These advantages are outweighed in most cases by the expense and inconvenience of such a method. However, facultative reinsurance is commonly used in crop insurance for specific crop insurance products, or for individual large projects, especially in the early years, until experience is gained by all parties.

Flood

The overflowing or deviation from their normal channels of either natural or artificial water courses, and the bursting or overflowing of public water and other flow of water originating from outside the insured property.

Forestry Insurance

Protection against loss or damage to trees (standing timber), most commonly against fire, catastrophic windstorm, snow, flood or earthquake events. Escalating valuation and indemnity systems are applied in order to reflect the increasing volume of timber and thus exposed values at risk with increasing age of the trees.

Franchise

An amount of loss that has to be reached before the insurer will pay a claim. Once this threshold is met, the insurer has to pay the claim in full. e.g. A farmer insured his crop for US$1000 with a franchise of US$100. If the claim is for US$99, then this is borne by the farmer. If the claim is for US$101, however, then the whole amount of the US$101 is paid by the insurer.

Freeze

Damage to crops begins when temperatures fall below zero degrees Celsius, either through freezing of surface water or freezing of internal plant cell moisture. The degree of damage in most cases is a function both of the temperature and the time involved. In many crop insurance circles this term is used interchangeably with frost. In the US, however, the term “freeze” is commonly applied to advection caused by the invasion of low temperature air masses into an area, as distinct from “frost” which relates to radiative cooling. Advection cooling tends to occur on a widespread scale, and may last for many consecutive nights. It can result in severe damage to crops. Conversely, radiative cooling tends to occur only for a night or two, and frost prevention measures, notably increasing wind circulation, can have a strong warming effect on temperatures in the immediate vicinity of crops and trees.

Frost

Radiative cooling below zero degrees Celsius (see “Freeze”).

Guaranteed yield

The expected physical yield of a crop stated in the insurance policy, against which actual yields will be compared when adjusting any losses.

Hail

Precipitation in the form of ice granules which according to the size and quantity thereof can cause severe damage to livestock and crops.

Hazard

A physical or moral feature that increases the potential for a loss arising from an insured peril or that may influence the degree of damage sustained.

Hurricane

See Cyclone.

Inception date

The date on which the insurance cover commences.

Indemnity

The amount payable by the insurer to the insured, either in the form of cash, repair, replacement or reinstatement in the event of an insured loss, is termed the indemnity. The amount is measured by the extent of the insured’s pecuniary loss. It is set at a figure equal to but not more than the actual value of the subject matter insured just before the loss, subject to the adequacy of the sum insured. This means for many crops that an escalating indemnity level is established, as the growing season progresses.

Index Insurance

This is a very new type of crop insurance in which an indemnity becomes payable upon the certified occurrence of the weather event to which the insurance relates. This is also known as “Coupon insurance” since coupons or tickets replace the normal insurance policies. The main difference between this and standard crop insurance is that crop losses are not measured, either on individual insured farms or on an area basis. Rather, reliance for triggering the coupon is based upon data generated by weather recording instruments, with the possibility of verification of the occurrence of the insured weather event by recourse to aerial or satellite photography.

Insurable interest

An insurance policy is only valid if the insured is related to the subject matter insured in such a way that he will benefit from its survival, suffer from loss or damage caused to it or may incur liability in respect of it.

Insurable yield

A term used in crop insurance to represent the maximum yield that will be insured under a policy. It is usually expressed as a percentage of the potential yield of a crop. The latter is established by reviewing previous production in the area to be insured, assessing the potential of the land to grow the crop and the farmer’s management capabilities, and by inspecting the actual growing crop to assess its potential yield.

Insurance

A financial mechanism which aims at reducing the uncertainty of loss by pooling a large number of uncertainties so that the burden of loss is distributed. Generally each policy holder pays a contribution to a fund in the form of a premium assessed by the insurer, commensurate with the risk he introduces, which is established and administered by the insurer and out of these funds are paid the losses suffered by any of the insured.

Insurance agent

This is one who solicits, negotiates or effects contracts of insurance on behalf of his principal (normally an insurer).

Insurance broker

A broker represents an individual or firm wanting to buy insurance. In most jurisdictions a broker may also be an agent of the insurer for collection of the premium and delivery of the policy.

Insurance damage rate (IDR)

Generally the insurance damage rate is expressed as a percentage and is applied for the sum total of one type of an insurer’s business in a given year. For example, the IDR for paddy rice in Japan in 1976 was 8.3 percent. Other terms for IDR are “damage rate” and “loss cost”.

Insurance policy

A formal document including all clauses, riders, endorsements and papers attached thereto and made a part thereof which expresses the terms, exceptions and conditions of the contract of insurance between the insurer and the insured. It is not the contract itself but evidence of the contract. In compulsory schemes the individual insured may not hold a formal insurance policy document directly related to the insurance contract but an insurance certificate which gives a brief outline of the insurance terms and conditions.

Insurance unit in individual approach

A term used in crop insurance to represent the area of land to be covered by a policy. The area of land may either be a single plot or the total of several plots of the same crop type farmed as one unit by the insured. The spread of risk improves as the area to be insured increases.

Insured

The person or business entity covered by an insurance policy.

Insured peril

The cause of loss stated in the policy which on its occurrence entitles the insured to make a claim; e.g. hail, frost, wind, drought, excessive rain, pests and diseases.

Insurer

The company which issues an insurance policy and is named in the policy as being responsible for paying a claim should a loss event result in damage to the insured property.

Livestock insurance

This is a class of agricultural insurance which generally centres on the provision of mortality cover for livestock due to named disease(s), and accidental injury. Insurance cover is normally restricted to adult animals and may be taken out on an individual animal or herd basis. Major classes of insured livestock include beef and dairy cattle, sheep, goats and pigs and domestic fowl. A special type of cover is sometimes bought by owners of valuable sires, e.g. stallions, bulls, against loss of performance through accident.

Loss

An event giving rise to a claim under the insurance policy; a claim, or the disappearance of the insured property through an act such as theft as opposed to its survival in a damaged state.

Loss adjuster

A representative of the insurance or an independent person employed by the insurer to assess and determine the extent of the insurer’s liability for loss or damage claimed by the insured.

Loss adjustment

Determination of the extent of damage resulting from occurrence of an insured peril and settlement of the claim. Loss adjustment is carried out by the appointed loss adjuster who works on the behalf of the insurer.

Loss assessment

The first stage of loss adjustment i.e. estimation of extent of loss caused by the insured peril.

Loss cost

Same as the insurance damage rate i.e. claims expressed as a percentage of the total sum insured or total liability.

Loss frequency

The rate of occurrence of losses, often expressed in terms of the number of incidents over a period of time. This measure can be used to assist in rating a policy and for judging the effectiveness of loss prevention facilities.

Loss ratio

The proportion of claims paid (or payable) to premium earned.

Malus

An addition to insurance premium as a result of previous claims.

Maximum possible loss (MPL)

The largest loss believed to be possible for a certain type of business. (See also “Probable maximum loss” - PML.)

MCPI

See “Multi-peril crop insurance”.

Moral hazard

The risk or danger to look for from human nature, both individual and collective. Moral hazard depends mainly on the character of the society, the character of the insured, and on the character of his employees and the manner in which they work and behave at work. Examples resulting from moral hazard include: carelessness, fraudulent claims, crime or arson, irresponsibility, gross over-insurance, general decline in moral climate due say to a period of recession, and unreasonable demands over claims settlements.

Multi-Peril Crop Insurance (MPCI)

A type of crop insurance in which a number of perils are covered and where the basis for establishing the sum insured is the expected yield, as determined by production history over a number of years. This has the advantage that there is no need, in loss assessment, to assign percentages of loss to individual perils. This type of policy is known as “yield-based”.

Mutual company

A company established to undertake insurance for its members, thereby receiving all benefits from profits. A mutual company has no risk capital provided by external parties. In agricultural terms a mutual company could be formed by a group of farmers who each pay a premium into a fund that they control, rather than paying to an insurance company.

No claims bonus (discount)

For an insured who in previous years of insurance has made no claims, underwriters may decide to reduce the renewal premium, the premium reduction being termed the No Claims Bonus or No Claims Discount.

Normal yield

This is that yield which a number of years’ experience indicates can be expected from a particular plot under normal conditions, when no extraordinary natural disaster or unusual meteorological events occur. In practice the modal yield value (the yield most commonly occurring) is taken as the normal yield. The mode is also the yield most commonly conceived by farmers as being acceptable, since they generally ignore bad years when estimating future yields on the basis of past performance.

Notification of claim

Insurance policies usually contain a provision stating that any occurrence of an insured peril which could result in a claim must be reported to the insurer within a specified period of time.

Off risk

A term used when insurance has either expired or been cancelled.

On risk

A term used to describe the policy during the period of insurance.

Partial loss

The loss of part of the insured property. This is often experienced in crop insurance, but not so much in livestock insurance where mortality cover is the norm and an insured animal is either alive or dead. However, many livestock policies cover groups of animals - herds or flocks, and as such partial losses can be experienced.

Peril

A potential cause of loss or damage to the property. Perils can be insured or uninsured, both are normally named on the insurance policy. It is therefore important that loss adjustment procedures enable distinction to be made between damage caused by insured and by uninsured perils respectively. The main natural perils mentioned in agricultural insurance policies include: fire, flood, freeze, hail, wind, excess rain and drought.

Period of insurance

The period of protection for which the policy is issued. Any losses taking place outside this period are not indemnified. For annual crops this period of insurance normally commences at the time of sowing, sprouting, blooming or transplanting and ends at the time of harvest. For perennial crops, e.g. oil-palm, the period of insurance may be on an annual basis.

Physical hazards

A physical feature that increases the chances of a loss happening, for example, in crop insurance, if a disease is insured, the occurrence of a weather peril, such as continuous rain, may enhance the occurrence of the disease, just as hot, dry weather increases the fire risk in a forest.

Policy

A document setting out the terms of insurance for the insured property.

Premium

The monetary consideration payable by the insured to the insurers for the period (or term) of insurance granted by the policy.

Premium rate

The price per unit of insurance. Normally expressed as a percent or per mille of the sum insured.

Probable maximum loss (PML)

An estimate of the maximum loss that is likely to arise on the occurrence of a single event considered to be within the realms of probability. Remote coincidences and possible but unlikely catastrophes are ignored in the estimation of a PML. (See also “Maximum possible loss”.)

Pure premium

The amount required by an insurer to pay losses under an insurance policy prior to taking into account the insurer’s general expenses.

Rate

The amount charged by the insurer or reinsurer for the insurance. This is usually expressed as a percentage of the sum insured. The amount to which this equates is the premium.

Reinsurance

When the total exposure of a risk or group of risks presents a hazard beyond the limit which is prudent for an insurance company to carry, the insurance company may purchase reinsurance i.e. insurance of the insurance. This purchase is also known as ‘ceding’. Reinsurance has many advantages including (i) levelling out the results of the insurance company over a period of time; (ii) limiting the exposure of individual risks and restricting losses paid out by the insurance company; (iii) may increase an insurance company’s solvency margin (percent of capital and reserves to net premium income), hence the company’s financial strength; and (vi) the reinsurer participates in the profits of the insurance company, but also contributes to the losses, the net result being a more stable loss ratio for the insurer over the period of insurance.

Retention

1) The net amount of a risk that an insurer or reinsurer keeps for his own account and does not reinsure. 2) The premium kept by an insurer having paid any claims and expenses, which therefore equates to the insurer’s profit.

Return period

The time period between occurrences of the insured peril. For example, the return period for a hurricane may be once in every ten years. Return periods are established by analysing historical data on the insured peril.

Risk

In insurance this has several meanings: 1) the subject matter of insurance; the insured property. 2) uncertainty attached to the outcome of an event. 3) the probability of a loss. 4) the insured peril. 5) danger.

Risk management

Care to maintain income and avoid/reduce loss or damage to a property resulting from undesirable events. Risk management therefore involves identifying, analysing and quantifying risks and taking appropriate measures to prevent or minimise losses. Risk management may involve physical treatment, such as spraying a crop against aphids, using hail netting or planting windbreaks. It can also involve financial treatment, e.g. hedging, insurance and self-insurance (carrying sufficient financial reserves so that a loss can be sustained without endangering the immediate viability of the enterprise in the event of a loss).

Specific risk insurance

A policy that defines the perils to be covered by the insurance as opposed to an “All Risks” policy which covers a multitude of perils.

Stop loss

See “Excess of loss”. The term is usually reserved for reinsurance contracts.

Storm surge

An abnormally high sea level, caused by very strong on-shore winds. These are usually associated with hurricanes, and can cause greater damage than the windstorm itself.

Sum insured

The amount specified in the policy up to which the insurer will pay indemnities should the insured peril(s) occur and result in a loss to the insured property.

Threshold of insurability

In crop insurance this is the scale of a farm enterprise, level of husbandry skills and/or financial status, and degree of accessibility, below which a viable insurance contract cannot be administered by an insurer.

Treaty reinsurance

This is a contract between an insurer and one or more reinsurers to accept cessions of business, underwritten by the insurer, within pre-arranged limits. The reinsurer(s) cannot refuse to accept any ceded risk that falls within the terms of the treaty. The advantage of treaty reinsurance is that results on cost economies. Although many crop insurance programmes start off with facultative reinsurance, as experience is gained then gradual moves to treaty reinsurance can be expected. During treaty arrangements summaries of premiums due to reinsurers and claims due from them are given at periodic intervals.

Tropical storm

Any cyclone circulation originating over tropical waters having a distinct rotary circulation with wind speeds ranging between 63 to 118 km. per hour. Sustained wind speeds greater than 118 km/hr. bring a change of terminology to cyclone (or typhoon or hurricane, depending on geographical location).

Typhoon

See Cyclone.

Underwriting profit

Any profit resulting from an insurance or reinsurance before any interest has been added.

Unearned premium

Either premium of an insurance policy which never came to fruition or if an insurance policy has attached, the part of the premium which relates to the insurance period still to run.

Value

The value of the property to be insured. The basis of valuation varies depending upon the property to be insured. In crop insurance, the insured value may be based upon the production costs of the crop, market value of the crop, or reestablishment costs. The method of valuations is always set down at the time the insurance is purchased.

Voluntary scheme

An insurance programme in which individuals may choose whether or not to insure their property.

Windstorm

Currents of air of such a velocity that they cause physical loss or damage to the insured crops or agricultural buildings etc. See also cyclone, tropical storm and hurricane.

Yield

The production of the insured property per defined unit, for example in crop insurance the number of tonnes/ha. of crop product harvested.

Zoning

Dividing the geographical limits of an insurance programme into zones for rating purposes. For example, in crop insurance an area may be divided into zones according to climate, topography and natural vegetation. The premium rates vary between the different zones depending upon the frequency of occurrence.