1. Capital Modeling for Benefit Pools: A Case Study How Much is Enough (for us)?

2. Allow you to use our experience developing benefits reserve targets to think about an approach for your pool Objective

3. About CIS Benefits  Two trusts in one –Employee Benefits Services (EBS), founded by League of Oregon Cities in 1958 –Association of Oregon Counties Insurance Trust (AOCIT), founded by AOC in 1960 –Combined with CIS Trust in 1994, but still accounted for separately

4. About CIS Benefits  Medical, dental, vision, life, STD, LTD + many value-added services  As of 4/1/16: –273 member entities –11,720 employees –26,625 lives

5. CIS Benefits Reserves: A Brief History

6. Reserves = Rate Stabilization  Rate reduction primary use of reserves  Out-guessing the insurer  Sensitive to economy  Little to no emphasis on reserve amounts until out of options

7. Premium-to-Reserve History: Cities

8. Premium-to-Reserve History: Counties

9. How much did we need?

10. Decision to Self-Insure  Began considering in early 2000s  Goal of 25% of premium – statutory minimum  Pushed to action by 2007 legislation that created statewide school pool –Shut down school board association’s program –Self-insured districts were exempted

11. First Member Equity Policy - 2010  Claims reserve + rate stabilization reserve  Claims reserve –“Reinsurance corridor” (25% of contribution) –“Catastrophic loss reserve” –“Reserve Contingency” (= IBNR)  Rate stabilization reserve –Designated & undesignated

12. First Member Equity Policy – contd.  Reserve minimum: amount producing a ratio of net contribution to member equity =< 300% –Neither trust would meet minimum in 2005  Use of reserves in any year can’t change the ratio more than 25%  Amounts produced by formula adjusted annually  Uses of reserves defined

13. Finding the Balance

14. Defining Benefits Reserve Targets  Are the rates enough for the amount of claims we’re going to have?  Are there big claims we don’t know about?  What if we have a huge investment loss?  What if there’s a cyber attack or a HIPAA breach?  What if we get some big, new members?

15. CIS Benefits Assessing Economic Funding Needs Target Equity Study Kevin Wick FCAS, MAAA kevin.L.wick@pwc.com (206)398-3518 Derek Skoog FSA, MAAA derek.g.skoog@pwc.com (312)298-4133

16. PwC Project Approach Risk Measurement Financial Goals (Risk Appetite) Capital Requirements

17. PwC Risk Categories (Demands on Capital) Actual unpaid claims may be higher than current estimates Reserving Next year’s losses may come in higher than projected Underwriting Interest rates may go up which results in bond holdings decreasing in value Excess carrier may default Asset/Credit Next year’s administrative budget may be exceeded due to an unforeseen event Operational

18. PwC UnderwritingReservingAsset & CreditOperational Total Funding Need Capital Modeling Process Step 1: The uncertainty associated with each of this risk elements is measured. Step 2: The individual risks are aggregated into four broad categories considering interdependencies. Step 3: In a similar manner, the total funding need is determined through a risk aggregation process. Int. rate Counter - party Hazards System People Medical/ Rx Vision Dental Medical Rx Dental Vision Cyber Regulatory

19. PwC Overall Results – Cities (As of June 30, 2015) In the next 1 year time horizon, there is 1% chance (1-in-100 year event) that the current Trust financial risks (balance sheet and next year’s business only) will result in more than a $40M demand on program capital.

20. PwC Alternative Scenarios Reinsurance

21. PwC Alternative Scenarios Program Growth Description 25% growth Larger program  higher capital needs Fund need increase of $7.3M at 1-in-250 year level

22. PwC Alternative Investment Scenarios Shorter Duration Bonds Description Invest in shorter duration bonds (3 Years vs. currently 5 years) Shorter asset duration  lower capital needs Fund need decrease of $2.6M at 1-in-250 year level

23. PwC Summary of Alternative Scenarios

24. PwC Heatmap – Composition of Capital Need The heatmap shows the sources of capital need at 1-in-250 level:

25. PwC Determining Capital Targets Risk Measurement Financial Goals (Risk Appetite) Capital Requirements

26. PwC Context for Risk Appetite European and other developed countries set the “target” capital level at 1-in-200 Global Insurance Regulation “Minimum” capital requirement based on RBC formula – per an independent study, the formula represents 1-in-10 to 1-in-25 level for P/C industry NAIC (US Regulator)

27. PwC Perspective on various “industry” thresholds As of June 30, 2015 European Regulator Target/Rating Agencies 1-in-100 to 1-in-250

28. PwC Is the “insurance industry” the right context? There may be rationale for going above and beyond the insurance industry target, for pools: Pools do not “manage” their books (not renewing risks with worse loss experience), while insurance companies exercise this annually One of the main goals for pooling is rate stability, while insurance companies’ main goal is to generate profit Public insurance companies have different sources to raise capital from, while pools do not Members often depend on pools for services beyond the insurance mechanism

29. PwC Target Funding Ranges Considered Jun-15 Fund Balance

30. PwC Historical Net Position versus Retrospective Target Range

31. CIS Board Decisions

32. Trustee Discussion  “Biggest value to members is that we exist”  Desire to “strike a balance”  “Get through a really tough time and still provide for growth”  Value of process – “good to know what we didn’t know before”

33. Reserve Target – City Trust

34. Reserve Target – County Trust

35. Current Member Equity Policy  Same definitions, structure –Claims reserve, rate stabilization reserve –Single year use can’t increase contribution/member equity ratio > 25%  Minimum & maximum of target range defined by PwC study

36. By the numbers Full policy: http://www.cisoregon.org/dl/Xn9pOn16 http://www.cisoregon.org/dl/Xn9pOn16

37. Lynn McNamara, CIS lmcnamara@cisoregon.org lmcnamara@cisoregon.org (503)763-3810 Kevin Wick FCAS, MAAA kevin.L.wick@pwc.com (206)398-3518 Derek Skoog FSA, MAAA derek.g.skoog@pwc.com (312)298-4133 Questions?