1. U.S. POSTAL SERVICE’S NEW ROLE: Territorial Ratemaking Presented by: Geoffrey Werner, FCAS, MAAA 1999 Ratemaking Seminar (CPP-54)

2. Purpose To discuss issues associated with changes in the geographic unit underlying location-based rating.

3. Outline 4 Background 4 Policy Issuance 4 Data Collection/Analysis –Internal Data –External Data 4 Summary

4. Geographic Units 4 Location-based rating requires a measure of risk assigned to a geographic unit. 4 Many geographic units are in use today. –Zip codes (Five- or Nine-digit) –Counties –Cities/Townships –Census Tracts –Unique markers (e.g., streets) –Latitude/Longitude Background

5. Zip Codes 4 Commonly used geographical unit. –“1996 CAS Geo-coding Data Survey” –1996 Nebraska DOI Notice –California RH-338 4 Geographical labels intended for mail delivery NOT for data aggregation. 4 Changed based on delivery needs and the changes cause problems. –Policy Issuance –Data Analysis Background

6. Policy Issuance If territorial boundaries are based on zip codes, zip code changes can cause unintended premium changes.* * True for any geographical unit susceptible to change. Policy Issuance BILL $

7. B A C D Zip Code Map F E J I H G Policy Issuance

8. Company Rate Manual (Effective January 1, 1994) Territory 1 Zip Codes A, B…………………$550 Territory 2 Zip Codes C, D…………………$495 Territory 3 Remaining zip codes*……..$440 * The remaining zip codes may be specifically listed. Policy Issuance

9. Rates as of January 1, 1994 B $550 A $550 C $495 D $495 Remainder $440 Policy Issuance

10. Zip Codes B and C Modified C Expanded to Include Some of B Remainder $440 B $550 A $550 Wow! A 10% decrease! Policy Issuance C $495 D $495

11. Rates as of January 1, 1994 Remainder $440 B $550 A $550 C $495 D $495 Policy Issuance

12. Zip Code K Created Contained within Territory 1 Remainder $440 B $550 A $550 C $495 D $495 K $440/$550 Policy Issuance

13. Remainder $440 B $550 A $550 C $495 D $495 Rates as of January 1, 1994 Policy Issuance

14. Remainder $440 B $550 A $550 C $495 D $495 K $??? Zip Code K Created Spanning 2 Territories Policy Issuance

15. Rate Options for New Zip Code 1 Rate for Remainder of State –In compliance with manual, if using generic “remaining zips” definition. 2 Rate of 1 or 2 –Minimizes number of insureds whose premiums change. –Lower rate ensures nobody’s rates increase. 3 Weighted Average of 1 & 2 –No change in overall premium. Policy Issuance

16. Main Point 4 Zip code changes can cause premium changes. 4 Companies must monitor zip code changes. –Review Postal Bulletin and/or Zip Alerts. –Update manual as needed. –Recognize premium changes. 4 Another option... Policy Issuance

17. “Lock-in” Boundaries 4 To “Lock-in” boundaries as of a date. –Determine boundaries based on current zip codes. –Translate boundary outlines into a set of polygons defined by latitude/longitude points. –Use GIS software to place the address in the appropriate polygon. –Include note on manual page: “Boundaries based on zip codes in effect as of January, 1994.” 4 Zip changes will NOT cause premium changes. Policy Issuance

18. Rates as of January 1, 1994 Remainder $440 B $550 A $550 C $495 D $495 Policy Issuance

19. Digitized Polygons/Rates Terr. 3 $440 Terr. 1 $550 Terr. 2 $495 Policy Issuance

20. GIS Places Insured in Territory Terr. 3 $440 Terr. 1 $550 Terr. 2 $495 Policy Issuance

21. Data Collection/Analysis Internal Loss Data 4 Changes in zip code boundaries can impact results of future internal loss data analysis. 4 Impact of zip changes varies. –Data coding procedures –Exposure distributions –Risk differences Data Collection/Analysis: Internal

22. Example from Paper Assumptions 4 Policy Dates –Policy renews on 1/1/94-98. –Loss occurs on 7/1/94-98. 4 Coding –Premiums coded correctly. –Losses Territory based on renewal. Zip code coded correctly. 4 Zip Code C expanded to include part of B. –Expansion effective 4/1/95. –Impacts 0.7% of company’s insureds. Data Collection/Analysis: Internal

23. Rates on January 1, 94 & 95 B $550 A $550 C $495 D $495 Remainder $440 Data Collection/Analysis: Internal

24. Remainder $440 Rates on January 1, 96, 97 & 98 Data Collection/Analysis: Internal B $550 A $550 D $495 C $495

25. Coding for Impacted Risks Premium Loss Year $ Terr/Zip $ Terr/Zip 94 $550 1/B $550 1/B 95 $550 1/B 96 $495 2/C$550 2/C 98 $495 2/C $550 2/C 97 $495 2/C $550 2/C Data Collection/Analysis: Internal $550 1/C All figures impacted by zip change are bolded & italicized.

26. Territory Impact Exposures Relativities Terr. Before After Current Ind. Impact 1 10.6%9.9%1.001.00 0% 26.1%6.8%.90.911% 383.3%83.3%.80.80 0% Data Collection/Analysis: Internal

27. Zip Code Impact Exposures Relativities Zip Code Before After Current Ind. Impact A5.0%5.0%1.001.000% B5.6%4.9%1.00.97(3)% C2.1%2.8%.90.978% D4.0%4.0%.90.900% Remainder 83.3%83.3%.80.800% Data Collection/Analysis: Internal

28. Notes on Impact 4 If the zip code change is contained within the territory,there is no impact on the territorial relativity analysis. 4 Impact on raw relativities mitigated by –Credibility procedures. –Clustering analysis. Data Collection/Analysis: Internal

29. Internal Data Adjustments 4 Ignore if scenario testing reveals impact is immaterial. 4 “Lock-in” boundaries –Fixes territorial relativity analysis. –Does not fix zip code based boundary analysis. 4 Manually re-map data. 4 Systematically re-map data with software that converts addresses to new zip codes. Data Collection/Analysis: Internal

30. Data Collection/Analysis External Data 4 Companies may use external data to supplement internal loss data. 4 External data aggregated by zip code is also affected by zip code changes. –Competitive Data –Non-Insurance Data Data Collection/Analysis: External

31. Competitive Data 4 Competitors’ rates/relativities are often used to compare to indicated relativities. 4 Same issues impact competitors; thus, it may be unclear which zip code version underlies rates. Data Collection/Analysis: External

32. Non-Insurance Data 4 Companies often use non-insurance data to bolster credibility of raw indicated relativities. –Traffic Density –Theft Rates 4 Multi-year data is usually aggregated over several zip code versions. Data Collection/Analysis: External

33. Utilization of External Data 4 Judgement –Actuaries review supplemental data to aid in the decision-making process. –Data does not need to be adjusted. 4 Formulae –Actuaries utilize the data in a formula (e.g., traffic density/frequency regression model). –Data should be adjusted (e.g., newly added zips may have no value). Data Collection/Analysis: External

34. External Data Adjustments 4 Ignore the zip code changes if –Changes are immaterial. –Data being used to supplement judgement. 4 Adjust the data. 4 Assign each zip code a value equivalent to the zip code plus all contiguous zip codes. –Minimizes impact as changes affect a smaller proportion of the grouped zips. –Masks differentiation by zip code. Data Collection/Analysis: External

35. Summary 4 Many companies utilize zip codes for location-based rating. 4 Zip code changes cause problems. –Policy Issuance –Future analysis 4 At the very least, companies must be aware of the impact of zip code changes. 4 Steps can be taken to minimize the impact of zip code changes.