1. Washington State Transit Insurance Pool Target Fund Balance Review Strictly Private and Confidential Final Report Presentation September 27, 2012

2. Target Fund Balance Process 1.Target Funding Statement 2.Review ALL major risks facing the pool 3.Review the pool’s own risk profile coverage, retention, risk management program, etc in contrast to formula approach 4.Risk Aggregation reflecting correlation Business Model Risk Capital Requirements 2

3. PwC September 27, 2012 3 Target Funding Statement “We would like to have enough fund to protect our members from a 1-in-100 to 1-in-200 year event in the next year, under the current retention or the $5m liability retention” 3 Indicator What are we measuring? (all options eventually come back to fund level) Severity What is the tolerable level of this selected “indicator”? Frequency What is the tolerable frequency that the selected indicator hits the selected severity Time Horizon What time horizon is the fund supposed to protect? Extremity

4. PwC September 27, 2012 4 Major Risk Categories What could deteriorate the current fund level? Most of the asset and liability items are variable, as well as the profitability of the next year’s business, putting the total fund value at risk. 4 AssetLiability + Fund County Investment Pool$27.5mUnpaid Reserves$10.9m Reinsurance recoverable$0.7mOther Liabilities$0.3m Other current assets$0.3mTOTAL LIABILITIES$11.2m Non-current assets$0.4m Equity in reinsurer$1.2mTOTAL FUND$18.9m TOTAL ASSET$30.1m

5. PwC September 27, 2012 5 Major Risk Categories 5 Underwriting Risk that the next year’s business result may deviate from plan Catastrophic events Systemic losses Reinsurance cost Market cycle Price inadequacy, etc. Reserving Risk that the eventual loss & expense may exceed booked reserves Excessive inflation Judicial environment on certain claim types Latent claims, etc. Asset & Credit Risk that the value of investment asset and receivables may decrease County Investment Pool – exposed to interest rate risk and default risk Reinsurer failure Operational Any other unplanned expense that may arise from operation External events such as an earthquake People related (turn over, fraud, reputational) System and process failure, etc. Simulation based approach using historical data Stress scenario test approach based on discussions

6. PwC September 27, 2012 6 Risk Aggregation Once all the individual risks are quantified, We don’t simply sum across these numbers to get overall funding need, because this assumes that all those events are occurring at the same time (100% correlated), which is an unduly pessimistic assumption. Developed a correlation structure (between lines of business, and between risk categories, etc.) to reflect diversification and aggregated the funding level across those components. 6 ALGL APD UnderwritingReservingAsset & CreditOperational Int. rate Count er- party Equity Extern al SystemPeople Total Funding Need PR ALGL APDPR

7. PwC September 27, 2012 7 Risk Aggregation Let’s discuss the level of correlation (degree of two things going bad together) Asset & CreditInterest RateReinsurer failure Interest Rate100%Low Reinsurer failureLow100% Risk Categories UWReservingAsset+ Credit Operational UW100%HighMed ReservingHigh100%MedLow Asset+CreditMed 100%Med OperationalMedLowMed100%

8. PwC September 27, 2012 8 High Level Study Result – Target Funding Range 8

9. PwC September 27, 2012 9 Heatmap Property 1% of Fund Need 28% of Premium APD 5% of Fund Need 76% of Premium 261% of Reserves GL 14% of Fund Need 204% of Premium 208% of Reserves AL 67% of Fund Need 150% of premium 126% of Reserves Reinsurer Relationship 6% of Fund Need 54% of GEM items on B/S Investment in Bond 4% of Fund Need 3% of TCIP + LGIP People 1% of Fund Need System 1% of Fund Need External 1% of Fund Need UW and Reserving 87% Asset and Credit 10% Operational 3%

10. PwC September 27, 2012 10 Application of Results to 2013 Rate Level Decision (assuming goal of supporting $5 million SIR) 10

11. PwC September 27, 2012 11 Application of Results to 2013 Rate Level Decision (assuming goal of supporting current SIRs)

12. PwC September 27, 2012 12 Current Policy Guidance

13. pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2012 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.