U.S. POSTAL SERVICE’S NEW ROLE: Territorial Ratemaking

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 • Background • Policy Issuance • Data Collection/Analysis • Internal Data • External Data • Summary

4. Background Geographic Units • Location-based rating requires a measure of risk assigned to a geographic unit. • 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

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

6. Policy Issuance BILL $ 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.

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

8. Policy Issuance 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.

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

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

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

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

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

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

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

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

17. Policy Issuance “Lock-in” Boundaries • 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.” • Zip changes will NOT cause premium changes.

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

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

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

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

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

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

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

25. Data Collection/Analysis: Internal $550 1/C 97 $495 2/C $550 2/C 98 $495 2/C $550 2/C All figures impacted by zip change are bolded & italicized. Coding for Impacted Risks Premium Loss Year $ Terr/Zip $ Terr/Zip 94 $550 1/B $550 1/B 95 $550 1/B 96 $4952/C $550 2/C

26. Data Collection/Analysis: Internal Territory Impact Exposures Relativities Terr. Before After Current Ind. Impact 1 10.6% 9.9% 1.00 1.00 0% 2 6.1% 6.8% .90 .91 1% 3 83.3% 83.3% .80 .80 0%

27. Data Collection/Analysis: Internal Zip Code Impact Exposures Relativities Zip Code Before After Current Ind. Impact A 5.0% 5.0% 1.00 1.00 0% B 5.6% 4.9% 1.00 .97 (3)% C 2.1% 2.8% .90 .97 8% D 4.0% 4.0% .90 .90 0% Remainder 83.3% 83.3% .80 .80 0%

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

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

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

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

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

33. Data Collection/Analysis: External Utilization of External Data • Judgement • Actuaries review supplemental data to aid in the decision-making process. • Data does not need to be adjusted. • 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).

34. Data Collection/Analysis: External External Data Adjustments • Ignore the zip code changes if • Changes are immaterial. • Data being used to supplement judgement. • Adjust the data. • 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.

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