1. Small Cities Organized Risk Effort (SCORE) Target Funding Benchmarks
Presented by:
Marcus Beverly, Alliant Insurance Services
October 26th, 2017

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

3. 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

4. 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).

5. 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.

6. 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

7. Financials Used For Liability Benchmarks
Policy Period
Net Position
Expected
Liabilities
Net Deposit
SIR
2007/08
$3,392,086
$1,388,000
$1,480,425
$500,000
2008/09
$3,931,387
$2,313,028
$1,728,317
2009/10
$4,610,928
$1,900,426
$1,829,891
2010/11
$6,268,407
$1,494,464
$2,311,141
2011/12
$5,132,625
$1,203,539
$1,590,902
2012/13
$4,852,756
$1,198,024
$1,126,500
2013/14
$3,761,528
$2,366,675
$1,068,960
2014/15
$3,645,684
$1,964,506
$1,036,925
2015/16
$4,452,695
$1,534,673
$1,191,163
2016/17
$5,035,912
$1,067,063
$1,183,144
2017/18
n/a
$1,220,596

8. Financials Used For Work Comp Benchmarks
Policy Period
Net Position
Expected
Liabilities
Net Deposit
SIR
2007/08
$2,938,149
$2,984,000
$1,320,143
$150,000
2008/09
$4,875,923
$3,665,493
$1,352,768
2009/10
$4,783,483
$3,222,232
$1,464,640
2010/11
$5,154,874
$3,110,823
$1,387,654
2011/12
$2,387,989
$3,312,946
$884,774
2012/13
$1,681,028
$3,995,682
$930,248
$250,000
2013/14
$1,376,143
$4,824,131
$1,104,875
2014/15
$2,400,948
$4,019,956
$1,367,626
2015/16
$3,269,231
$3,801,814
$1,415,304
2016/17
$2,395,499
$4,293,232
$1,475,584
2017/18
n/a
$1,636,125

9. 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 10 full GL SIR losses, and up to 9.6 full WC SIR losses.
Both programs are above benchmarks. GL continues to grow, WC returned to 2015 level.
Dividends, losses, and increasing the WC SIR have reduced this ratio over the last five years.

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

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

12. 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 13%. Second year of increases, reversing four years of decreases.
WC – decrease of 27%, after two years of substantial growth. Still healthy at $2.4 million.

13. Change in Net Position – Liability Benchmark ≥ - 10%
$4,452,695
Benchmark

14. Change in Net Position – Work Comp Benchmark ≥ - 10%
$3,269,231
Benchmark

15. 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 seven years.
WC – reversal after two years of improvement and now outside benchmark

16. Expected Liabilities to NP – Liability Benchmark ≤ 1.5:1

17. Expected Liabilities to NP – WC Benchmark ≤ 1.5:1

18. 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 – decrease of 30%, third year of decreases, steady results nine of ten years.
WC – increase of 13%, above benchmark and impacting ratio to Net Position. Nine of ten years within benchmark.

19. Change in Liabilities – Liability Benchmark ≤ 20%

20. Change in Liabilities – Work Comp Benchmark ≤ 20%

21. 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 five years
WC – increase in ratio but still within benchmark.

22. Net Deposit to NP - Liability Benchmark ≤ 1:1

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

24. 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.
WC – steady for two years after three years of increases.

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

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

27. Summary of Benchmarks Program Large Losses Reserving Errors
Pricing Errors GL
Continued improvement to twice the benchmark at 10:1
Continued decrease in reserves driving improved results
Well within benchmark and continuing to improve WC
Decrease in ratio but still almost twice the benchmark at 9.6:1
Increase to above benchmark due to increase in liabilities
Increase in ratio but still well within benchmark

28. Dividends Released By Year- Liability

29. Dividends Released By Year- Workers’ Compensation

30. Program Year Trends
Overall the SCORE programs remain well funded and within target benchmarks.
Significant dividends paid over the last several years have been offset this year by a decrease in liabilities in GL but not in WC.
WC and GL programs still have less room for error and dictate a more conservative approach until the trends change.

31. Conclusion
SCORE is well funded to meet its future claims liabilities and the margin for error has improved for the GL program somewhat this year. The programs will continue to be closely monitored to try to anticipate and mitigate any negative trends.

32. Any Questions?