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

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Presentation on theme: "U.S. POSTAL SERVICE’S NEW ROLE: Territorial Ratemaking Presented by: Geoffrey Werner, FCAS, MAAA 1999 Ratemaking Seminar (CPP-54)"— Presentation transcript:

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 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/ –Loss occurs on 7/1/ 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 %9.9% % 26.1%6.8% % 383.3%83.3% % Data Collection/Analysis: Internal

27 Zip Code Impact Exposures Relativities Zip Code Before After Current Ind. Impact A5.0%5.0% % B5.6%4.9% (3)% C2.1%2.8% % D4.0%4.0% % Remainder 83.3%83.3% % 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.


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