Washington State Transit Insurance Pool Experience Rating August 27, 2009 Presented by: Kevin Wick,...

Washington State Transit Insurance PoolExperience RatingAugust 27, 2009

Presented by:Kevin Wick, FCAS, MAAA

PricewaterhouseCoopersAugust 2009

Slide 2

Overview

• Basic Foundation• Historical Perspective• Industry Perspective• Experience Rating

- Traditional Framework- Defining Comparison- Incorporating

Comparison Result• Current Environment• Common Pitfalls


Slide 3

Basic Foundation

• Are you a bank or a pool?• If pool, members contribute

funds in proportion to their level of risk- Rating system

measures risk• With experience rating,

past losses are being used to help project future risk- Supplements primary

allocation basis (miles)


Slide 4

Historical Perspective

• Is a driver with one accident more likely to have a future accident?- Are past accidents correlated

with future accidents?• Extent of correlation defines extent

future rates should be adjusted due to past losses- Credibility, or credence,

concept• High or low mod may simply mean

primary rating unit does not completely measure risk


Slide 5

Industry Perspective

• Insurance Industry- More sophisticated models

required if membership or “insured pool” is not homogeneous

- Large databases to measure correlation

• Governmental Pools- Same principles- Homogeneous membership

allows simplified approach


Slide 6

Experience RatingTraditional Framework

• If a member’s losses are greater than average, they pay more

• If a member’s losses are less than average, they pay less

• Such statements imply past losses are correlated with future loss potential

• How are losses defined?- Number of years- Caps on specific losses

• How do you blend result?

Miles (primary rating basis)

X

Base Rate

X

Experience Mod

=

Contribution


Slide 7

Experience RatingDefining Comparison

• Actual member losses in experience window compared with “expected” losses

• Expected is based on share of primary rating unit, or exposure- If 10% of miles, then

expected to have 10% of losses


Slide 8

Experience RatingDefining Comparison – Number of Years (Decision 1)

• Should experience window be 3 years, 5 years, 10 years?- improved correlation- “ticket on record” concept- maturity of losses

• Most often most recently completed 3 or 5 years is used

• All else being equal, a longer experience window results in more stable experience mods


Slide 9

Experience RatingDefining Comparison – Loss Limit (Decision 2)

• Typically losses that enter the experience rating formula are capped- Mitigate impact on one

catastrophic claim• A member with three $250,000

claims is viewed as having greater likelihood of future losses than a member with one $1 million claim

• All else being equal, lower caps result in more stable experience mods


Slide 10

Experience RatingIncorporating Experience

• If member’s losses are 50% higher than average, should they have a 1.50 experience mod?- If yes, rates will fluctuate

substantially as individual member experience fluctuates substantially

- If no, then need to define how experience is considered• Typically partial weight

Example using 25% Weighting (credibility)

• Member relative loss experience is 1.50

• Experience mod calculation- 1.50 x 25% + 1.00 x (1-25%)

• 1.00 is the average mod- Mod = 1.125

• The less credibility, the closer the mods are to 1.00- If the credibility is 0%, the mod

is 1.00


Slide 11

Experience RatingCredibility (weighting) Considerations (Decision 3a and 3b)

• Experience of smaller members is more volatile than larger members- Handled through sliding scale- Larger members with the more

statistically significant experience have more credence placed on such

• Desired stability can be achieved by adjusting the degree of credibility- What are acceptable annual

rate changes?• Should balance of weight be on

1.000 or prior mod?


Slide 12

Hypothetical Individual Member Experience

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 13

Hypothetical Individual Member Experience5 Year Rolling Average with Large Claims Capped

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1989

-93

1990

-94

1991

-95

1992

-96

1993

-97

1994

-98

1995

-99

1996

-00

1997

-01

1998

-02

1999

-03

2000

-04

2001

-05

2002

-06

2003

-07

2004

-08


Slide 14

Example of Current Formula

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.000

0.500

1.000

1.500

2.000

2.500

Member Relativity Current Formula

First step is to measure the member losses as defined in the rating

formula


Slide 15


1.47

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.000

0.500

1.000

1.500

2.000

2.500


Secondly, member’s experience is compared to

average experience of group (normalized for size)


Slide 16


1.047

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.000

0.500

1.000

1.500

2.000

2.500


Final step is to weight between average relativity

of 1.000 and indicated relativity


Slide 17


$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.000

0.500

1.000

1.500

2.000

2.500



Slide 18

Balance of Weight on Prior Mod

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.000

0.500

1.000

1.500

2.000

2.500

Member Relativity Weight on Prior Mod


Slide 19

Experience RatingSummary of Decisions

1. Number of Years

2. Loss Cap

3. Weighting

a. Degree of responsiveness

b. Weight on 1.000 or Prior Mod


Slide 20

Current Trends

• Coordinate experience rating with benchmarking

• More formal reviews and education- Workshops with

stakeholders• More sophistication for

decisions- Basis for choices- Retrospective application

• Move toward more stable mods• Simpler presentations


Slide 21

Common Pitfalls

• Choices/tradeoffs and formula are not understood

• Dealing with long-term higher or lower than expected loss levels

• System patched together with caps versus addressing the issue

• Untested non-traditional systems

Stable

Responsive

FairSimple


Slide 22

Ben FranklinNet Incurred Loss by Year

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 23

ClallamNet Incurred Loss by Year

$0

$20,000$40,000

$60,000$80,000

$100,000

$120,000$140,000

$160,000$180,000

$200,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 24

ColumbiaNet Incurred Loss by Year

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 25

CommunityNet Incurred Loss by Year

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 26

CowlitzNet Incurred Loss by Year

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 27

EverettNet Incurred Loss by Year

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 28

GrantNet Incurred Loss by Year

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 29

Grays HarborNet Incurred Loss by Year

$0

$50,000$100,000

$150,000$200,000

$250,000

$300,000$350,000

$400,000$450,000

$500,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 30

IntercityNet Incurred Loss by Year

$0

$100,000$200,000

$300,000$400,000

$500,000

$600,000$700,000

$800,000$900,000

$1,000,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 31

IslandNet Incurred Loss by Year

$0

$50,000

$100,000

$150,000

$200,000

$250,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 32

JeffersonNet Incurred Loss by Year

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 33

KitsapNet Incurred Loss by Year

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 34

LinkNet Incurred Loss by Year

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 35

MasonNet Incurred Loss by Year

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 36

PacificNet Incurred Loss by Year

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 37

PullmanNet Incurred Loss by Year

$0

$5,000$10,000

$15,000$20,000

$25,000

$30,000$35,000

$40,000$45,000

$50,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 38

SkagitNet Incurred Loss by Year

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 39

SpokaneNet Incurred Loss by Year

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 40

TwinNet Incurred Loss by Year

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 41

ValleyNet Incurred Loss by Year

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 42

WhatcomNet Incurred Loss by Year

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 43

WSTIPNet Incurred Loss by Year

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 44

YakimaNet Incurred Loss by Year

$0

$2,000$4,000

$6,000$8,000

$10,000

$12,000$14,000

$16,000$18,000

$20,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Slide 45

TotalNet Incurred Loss by Year

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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