ESD 101 Unemployment Insurance Pool Changing the Funding Mechanism from Banking to Pooling - Follow up Discussion Kevin Wick, FCAS, MAAA

PwC Banking Model versus Risk Sharing Model Banking Model Every member responsible for their own claims Pooled program administration only Inefficient in that it requires more capital Pooling/Risk Sharing Model Losses are pooled so capital requirements are reduced Offsetting risks Pay a set contribution and the uncertain losses are paid by the Coop 2 Requires 1.Capital target 2.Rating system 3.Conversion from banking system

PwC Capital (Fund Balance) Target Proposed target capital of $1.6 million Need capital to provide a temporary buffer between cost spike and rate action 3 times largest claim year Build up target capital over a three year period based on taxable wages and losses 3

PwC Rating System Options Flat Rate Flat rate = costs/wages Same for everyone Experience Rating District rate = base rate x experience modification factor x taxable wages 4 year experience window Compare district losses per district taxable wages with overall losses per overall taxable wages $ minimum rate Admin plus minimal loss provision 2.0 maximum experience modification factor

PwC Conversion from Banking System Use current balances as an offset to insurance and fund-buildup charges Limit the offset to the amount of charges for member 5

PwC Summary of Charges - Aggregate (Assumes 3-year fund buildup and 3-year subsidy schedule) 6

PwC Summary of Charges – Specific Example 7 Amount Due = Loss/Admin contribution + Fund buildup contribution These charges will be offset by the member’s bank balance.

PwC Summary of Charges – Specific Example 8 Example 1: Loss/Admin contribution = $10,000 Fund buildup contribution = $25,000 Account balance = $150,000; Available subsidy = $50,000 (= $150,000/3) Contribution payable = $0 (= max of zero or $10,000 + $25,000 - $50,000) Example 2: Loss/Admin contribution = $15,000 Fund buildup contribution = $40,000 Account balance = $150,000; Available subsidy = $50,000 (= $150,000/3) Contribution payable = $5,000 (= max of zero or $15,000 + $40,000 - $50,000)

PwC After the 3-year transition period, how will Member Contributions be set? 9 1.No more requirement for Fund Buildup. 2.Member Contributions will be based solely on the estimated share of the Loss/Admin costs.

PwC What else needs to happen? Changes to Governing Documents 1.Remove references applicable to only the old banking system 2.Review governing documents regarding what happens should a member leave the Pool. 3.Define coverage “trigger” 4.Guidelines for rate determination 10

PwC Timetable Adopt new system, bylaws, etc. No effective change through 8/31/2015 Beginning 9/1/2015, claim funding source based on date filed (8/31/2015 and prior filings handled through bank accounts) Continued annual review and rate setting process Release all remaining account balances depending on choice of fund buildup and banking subsidy schedules 11

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