Example #1: When insured cattle are sold below the insured price

Nancy is an Alberta-based cattle rancher who was concerned about recent price fluctuations in the cattle market and has decided to insure the value of her herd, due to be sold in March 2013. She normally sells her cattle when they are around 850lbs and so chose to go with a Feeder Insurance Policy to insure against a lower price in the market in March 2013.

WCPIP Feeder Index (Alberta) Table 

Example #1 Image1.jpg
** These are sample premiums only and do not constitute an offer to sell insurance coverage.*
Nancy knows that each of her 100 steers will weigh approximately 850 pounds at the time of sale. She looks over the Feeder Index Table and decides that because it represents a value above her cost of production, she chooses a Coverage Level of $134 per cwt for her intended marketing time in mid-March and as such chooses a policy length of 20 weeks. From the table above, she can see that a 20 week policy (concluding 11 March, 2013) at $134 coverage will cost her $2.03 per cwt insured.
 

So her total premium cost will be as follows:

100 Head x 850 pounds = 85,000lbs   
85,000lbs in cwt 850cwt
850 x $2.03 (premium cost per unit) = $1,725.50    

Nancy markets her cattle as expected in March. The cattle market is performing below the prices expected when she bought her Feeder Insurance Policy.  As the market is showing little sign of improving, and may in fact fall further, she decides that there was no advantage to claiming on her Feeder Insurance Policy early in the expiry period, but allows the policy to expire. On expiry it qualifies for the settlement price applicable to her final week of insurance. (ie. the week up to 11 March, 2013.)

The settlement price for the last week of Nancy’s policy was $130. This means that Nancy’s actual insured price ($134) is $4 per cwt above the settlement price. Nancy receives the following payout from her WCPIP policy:

100 Head x 850 pounds = 850cwt of insured cattle
850 x $4 (difference between insured and settlement price) $3,400
850 x $2.03 (premium cost per unit)  $1,725.50
Net gain $1,674.50

Though Nancy did not get the price she was hoping for when she sold her cattle, because she insured her herd at the price she was hoping for, she was able to recoup what may otherwise have been a loss making, or less profitable position.