1. MEASURE, MANAGE, & REDUCE RISK SM NJAIRE Annual Cash Settlement (ACS)

2. Presentation by: Mike McAuley ISO – NJAIRE Central Processor June 2, 2014

3. NJAIRE Antitrust Preamble We are here to discuss and act on matters relating to the business of the New Jersey Automobile Insurance Risk Exchange and not to discuss or pursue the business interests of our individual companies. We should proceed with caution and alertness towards the requirements and prohibitions of federal and state antitrust laws. We should not engage in discussions – either at this meeting or in private conversations – of our individual companies’ plans or contemplated activities. We should concern ourselves only with the business of the New Jersey Automobile Insurance Risk Exchange as set forth in the agenda for this meeting. Only New Jersey Automobile Insurance Risk Exchange matters may be discussed at New Jersey Automobile Insurance Risk Exchange meetings and each company’s market plans cannot be discussed.

4. Annual Cash Settlement (ACS) – NJAIRE and Role of ACS The purpose of the Exchange is to compensate insurer members of the Exchange for claims paid for non- economic loss and claim adjustment expenses which would not have been incurred had the less costly tort limitation option, or verbal threshold, provided under the statute been elected by the injured party filing a claim for non-economic loss. The ACS is performed to accomplish this.

5. Agenda Overview – Numbers Summary Preparation –Reports to Members –Actuarial Committee ACS Reports ACS Calculations

6. ACS - Overview Approximately 120 members evaluated Data for 10 accident years evaluated –# of years dependent upon claim development Approximately $375M re-distributed in total annually for all accident years combined

7. ACS Preparation Aggregate statewide reports to members Actuarial Committee teleconference –Annual interest rate –Accident year conversion – exposure to claim method –Accident year assessment pots Established using Reportable Losses and Loss Adjustment Expenses as the base –Assessments per exposure Accident years evaluated in ACS under exposure method Upcoming accident year –Other matters –Recommendations submitted to the NJAIRE Board of Directors at subsequent meeting for approval

8. ACS Preparation Using Board approved amounts from Actuarial Committee recommendations –Interest and Investment Income factors for each accident year –Per claimant charges for each accident year (Exhibits C/I – I goes to members) Losses distributed by territory (include LAE) to determine % of statewide Territory % multiplied by accident year assessment pot to create territory pot Paid BI claimants vs. Zero Dollar distributed by territory Territory pot divided by Zero Dollar claimants to establish per claimant charge

9. ACS Reports Form 4 Report – Statewide Overview (Exhibit D) –Lists for each accident year: Statewide paid BI claimants against your zero dollar threshold insured Statewide paid BI claimants against your verbal threshold insured Statewide zero dollar threshold earned exposures Statewide verbal threshold earned exposures –Assessment at present rate for each accident year –Assessment allocation (reimbursement) for each accident year –Previous financial action for each accident year –Net amount due from/owed to member for each accident year – based on 3 items above –Interest on net amount due from/owed to member for each accident year –Total Calculated Form 4 amount due from/owed to member for all accident years

10. ACS Reports True-up Report (Exhibit E) –Form 4 report results – bottom line amount –Provisional financials transactions true-up Quarterly assessment (monthly payments) – Exhibit A Quarterly reimbursements – Exhibit B Interest on provisional financial transactions true-up –Re-distribution of investment income for each accident year –Member share of administrative expenses –TOTAL amount due from/owed to member as a result of ACS

11. ACS Calculations (Form 4 Report) Assessment at present rate (Exhibit F/I – I goes to members) –Claim method: At territory level, multiply each member’s # of paid BI claimants vs. Zero Dollar by calculated per claimant charge Territory assessments are summed to determine statewide calculated assessment (amounts listed on Exhibit D) –Exposure method: Multiply each member’s # of Zero Dollar exposures by assessment per exposure Reference “A”: 1 * 45,389.19 = 45,389

12. ACS Calculations (Form 4 Report) Assessment allocation (reimbursement) –Claim method: At territory level, divide member’s # of paid BI claimants vs. Verbal by # of industry claimants Multiply resulting % by total industry assessments for that territory Territory reimbursements are summed to determine statewide calculated reimbursement (amounts listed on Exhibit D) –Exposure method: Same process as claim method except Verbal exposures replace # of paid BI claimants vs. Verbal Reference “B”: (11/2,581) * 3,721,419 = 15,860.36

13. ACS Calculations (Form 4 Report) Previous financial transactions –The amount paid by (or paid to) each member as a result of previous ACS evaluations, excluding interest Net amount due from/owed to member –(Assessments – reimbursements – previous financial) Interest on net amount due from/owed to member –(Net amount * previously calculated interest factor)

14. ACS Calculations (True-up Report) Form 4 report results – bottom line amount for all accident years combined (Reference “C”) Provisional financial transactions true-up (4 quarters prior year) –Member paid in quarterly assessments –Member received in quarterly reimbursements –(Received - Paid) = net –(Net * previously calculated interest factor)

15. ACS Calculations (True-up Report) Re-distribution of investment income (Exhibits D/E/G) –For each accident year: Member’s reimbursement divided by industry reimbursements Resulting % multiplied by interest earned on funds while held by NJAIRE during provisional transaction process Difference between calculated share from last ACS to current = net amount owed to/due from company Net amount owed to/due from company * interest factor Reference “D”: (541,439.64/50,600,018.78) * 360,135.55 = 3,853.59

16. ACS Calculations (True-up Report) Member share of administrative expenses –Divide member’s statewide assessment from most recent accident year included in ACS by total industry assessments –Resulting % multiplied by administrative expenses to be collected –Note: As a result of the specialty vehicle exception, these member’s exposures must be factored into the equation. The total industry assessments are re-calculated in this stage as if specialty exposures were included in the assessment process. Reference “E”: (93,385/(291,098*95)) * 1,241,811 = 4,193.43

17. ACS Results to Members All members receive the following information: –Cover letter explaining all calculations –Form 4 report –True-up report –Industry exhibits by territory and accident year for (Exhibit I) : Per claimant charges Zero Dollar claims/exposures (depending on claims/exposure method) Verbal claims/exposures Assessments –Statewide results for all members by accident year –Invoice, if applicable

18. Questions? QUESTIONS?

19. Feedback In a continuing effort to educate member companies on the operations of NJAIRE, we’d appreciate your feedback on the material covered in this session. Please take a moment and go to https://www.surveymonkey.com/s/ZNPN9BH https://www.surveymonkey.com/s/ZNPN9BH and complete a brief survey.

20. Appendix

21. Exhibit A

22. Exhibit B

23. Exhibit C

24. Exhibit D

25. Exhibit E (1 of 3)

26. Exhibit E (2 of 3)

27. Exhibit E (3 of 3)

28. Exhibit F (1 of 2)

29. Exhibit F (2 of 2)

30. Exhibit G (1 of 2)

31. Exhibit G (2 of 2)

32. Exhibit H (1 of 2)

33. Exhibit H (2 of 2)

34. Exhibit I (1 of 4)

35. Exhibit I (2 of 4)

36. Exhibit I (3 of 4)

37. Exhibit I (4 of 4)