Livestock mortality catastrophe insurance using fatal shock process

Abstract

A major problem facing livestock producers is animal mortality risk. Livestock mortality insurance is still at the initial stages, and premium computation approaches are still relatively new and will require more research. We study multi-peril mortality insurance covering the death of livestock in Canada due to a number of natural causes and animal diseases. The coverage includes diseases that must be reported to the CFIA (Canadian Food Inspection Agency). When a Federal reportable disease (FRD) occurs, the CFIA orders the slaughter of animals. A general model to compute premiums, based on actuarial approaches, has been developed for mortality insurance incorporating FRD. This model can be applied to hogs, cattle, and poultry, and is designed to cover all stages of livestock production.Mortality multi-peril insurance premiums are computed for illustration purposes. Hogs are used as an example, specifically in their final 16 weeks (from the 9th week to the 25th week) when they weigh between 23 kg to 113 kg. This is referred to as the third stage (cycle) or the finishing/grower stage. Premium estimates are generated based on the mortality data. In addition, an additional CFIA reportable disease not seen in the data is assumed. However, it is assumed that producers receiving animal mortality compensation from the CFIA would have their mortality insurance indemnity payouts reduced by the amount of the CFIA animal compensation (no double collection of funds by producers). We introduce fatal shock processes to incorporate the CFIA reportable disease. Having these shocks, all hogs raised in the same farm are facing the same fate with FRD since all hogs will be slaughtered when it occurs. Mortality data is obtained from a North American sample from 1999–2007, covering 139 million hog-months over a number of monthly periods. We calculate premium rate based on per 1,000 hogs raised in the same farm with modifications including deductible and coverage level.