Small Cities Organized Risk Effort (SCORE) Target Funding Benchmarks Presented by: Marcus Beverly, Alliant Insurance Services October November 1, 2018

Outline Funding Policy – Purpose & Definitions Benchmarks – Key Risk Exposures Large Losses Reserving Errors Pricing Errors Trends & Takeaways

Target Funding Policy - Purpose Guidance for Board in development of annual funding, dividend and assessment decisions Provide benchmarks to measure and maintain the pool’s financial stability Expose deteriorating experience and react to minimize adverse impact on the pool

Definitions Net Deposit (ND) - total annual “premium” less excess insurance costs. Self Insured Retention (SIR) - the maximum amount of exposure to a single loss retained by SCORE. Confidence Level (CL) – an estimated probability that a given level of funding will be sufficient to pay actual claim costs. The higher a CL the greater certainty the actuary has that losses will not exceed the dollar value used to attain the CL. An estimate at the 70% CL means that in 7 of 10 years the amount will be at least enough to pay all applicable claims. Net Position (NP) (Equity, Surplus or Net Assets) - Total Assets less Expected Liabilities. Expected Liabilities (EL) – Outstanding Reserves plus Incurred But Not Reported (IBNR) and Loss Adjustment Expense (LAE), discounted, at the “Expected” CL (approx. 55% CL).

Definitions Incurred But Not Reported (IBNR) – the estimate of funds needed to pay for covered losses that have occurred but have not been reported to the member and/or SCORE, and expected future development on claims already reported. Loss Adjustment Expense (LAE) – administrative expenses to manage a claim to conclusion. Allocated LAE (ALEA) are expenses attributable to a specific claim, such as attorney fees. Unallocated LAE (ULAE) are overhead expenses not attributable to a specific claim, such as salaries or office rental.

Benchmarks Measure Exposure To: Large Losses – Net Position (NP) to SIR Reserving Errors –Expected Liabilities to NP Pricing Errors –Net Deposits to NP Also measure yearly changes & trends in Net Position, Liabilities, and Deposits

Financials Used For Liability Benchmarks

Financials Used For Work Comp Benchmarks

Net Position to Self Insured Retention Benchmark ≥ 5:1 This ratio is a measure of how many maximum SIR losses SCORE could pay from net Position. Helps determine the feasibility of increasing the SIR. A high ratio is desirable. Takeaway SCORE is sufficiently funded to withstand up to 11 full GL SIR losses, and up to 8 full WC SIR losses. Both programs are above benchmarks. GL continues to grow, WC slipped to 8 times the SIR. Dividends, losses, and increasing the WC SIR have reduced this ratio over the last six years.

Net Position to SIR – Liability Benchmark ≥ 5:1 SIR = $500,000

Net Position to SIR – Work Comp Benchmark ≥ 5:1 SIR = $250,000

Change in Net Position Benchmark ≥ - 10% A decline in net Position in excess of 10% may warrant an increase in annual contributions or an assessment. Large fluctuations in net Position indicate the program is experiencing change due to losses and/or dividends. Takeaway GL – increase of 8%. Third year of increases, reversing four years of decreases. WC – second year of decreases at 15%, after two years of substantial growth. Still healthy at $2 million.

Change in Net Position – Liability Benchmark ≥ - 10%

Change in Net Position – Work Comp Benchmark ≥ - 10%

Expected Liabilities to Net Position Benchmark ≤ 1.5:1 A measure of SCORE’s susceptibility to reserving errors and/or adverse loss development. Over time this ratio could also indicate changing loss exposures. A low ratio is desirable. Takeaway GL – continued improvement and steady results over the last eight years. WC – reversal after three years of improvement and not up to benchmark

Expected Liabilities to NP – Liability Benchmark ≤ 1.5:1

Expected Liabilities to NP – WC Benchmark ≤ 1.5:1

Change in Expected Liabilities Benchmark ≤ 20% Changes in reserves are an indicator of the accuracy of prior estimates by claims adjuster and actuary. Change greater than 20% in a year indicates reserving practices may not be conservative enough and/or loss exposures are increasing more than past losses indicate. TAKEAWAY GL – slight decrease after three years of big decreases, steady results nine of ten years. WC – slight increase after 13% jump last year. Nine of ten years within benchmark.

Change in Liabilities – Liability Benchmark ≤ 20%

Change in Liabilities – Work Comp Benchmark ≤ 20%

Net Deposit to Net Position (NP) Benchmark ≤ 1:1 A measure of how Net Position is leveraged against possible pricing inaccuracies. Relationship between annual deposits and Net Position Illustrates exposure to errors in assessing current risks. A low ratio is desirable. Takeaway GL – decrease in ratio and steady results over last six years WC – increase in ratio but still within benchmark.

Net Deposit to NP - Liability Benchmark ≤ 1:1

Net Deposit to NP - Work Comp Benchmark ≤ 1:1

Change in Net Deposits Recommended Benchmark ≤ 10% Change reflects actuary’s estimate of change in amount of future losses. A change of more than 10% may indicate funding has been too low, exposures are increasing, and/or risks of loss increasing. Takeaway GL – flat after two years of increases, but increased confidence level from 70% to 75%. WC – decrease of 10%, first in six years

Change in Net Deposit – Liability No Benchmark Set Suggested Benchmark < 10%

Change in Net Deposit - Work Comp No Benchmark Set Suggested Benchmark < 10%

Summary of Benchmarks Program Large Losses Reserving Errors Pricing Errors GL Continued improvement to twice the benchmark at 11:1 Decrease in reserves driving improved results Well within benchmark and continuing to improve WC Decrease in ratio but still almost twice the benchmark at 8:1 Little change this year, continue to monitor Increase in ratio but still within benchmark

Dividends Released By Year- Liability

Dividends Released By Year- Workers’ Compensation

2018-19 Program Year Trends Overall the SCORE programs remain well funded and within most target benchmarks. Significant dividends paid over the last several years have been offset in the past by a decrease in liabilities in GL but not in WC. Little change in liabilities for either this year. WC and GL programs are healthy though status can change quickly and WC on watch.

Conclusion SCORE is well funded to meet its future claims liabilities and the margin for error continues to improve for the GL program, particularly with increase to 75% CL. The programs will continue to be closely monitored to try to anticipate and mitigate any negative trends.

Any Questions?