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

Presented by:Geoffrey Werner, FCAS, MAAA1999 Ratemaking Seminar (CPP-54)

Purpose

To discuss issues associated with changes in the geographic unit underlying location-based rating.

Outline

Background

Policy Issuance

Data Collection/Analysis– Internal Data– External Data

Summary

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

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

Background

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$

B

AC

D

Zip Code Map

F

E

JI H

G

Policy Issuance

Company Rate Manual (Effective January 1, 1994)

Territory 1 Zip Codes A, B…………………$550

Territory 2 Zip Codes C, D…………………$495

Territory 3Remaining zip codes*……..$440

* The remaining zip codes may be specifically listed.

Policy Issuance

Rates as of January 1, 1994

B$550

A$550

C$495

D$495

Remainder$440

Policy Issuance

Zip Codes B and C ModifiedC Expanded to Include Some of B

Remainder$440

B$550

A$550

Wow! A 10%

decrease!

Policy Issuance

C$495

D$495

Rates as of January 1, 1994

Remainder$440

B$550

A$550

C$495

D$495

Policy Issuance

Zip Code K CreatedContained within Territory 1

Remainder$440

B$550

A$550

C$495

D$495

K$440/$550

Policy Issuance

Remainder$440

B$550

A$550

C$495

D$495

Rates as of January 1, 1994

Policy Issuance

Remainder$440

B$550

A$550

C$495

D$495

K$???

Zip Code K CreatedSpanning 2 Territories

Policy Issuance

Rate Options for New Zip Code1 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

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...

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.

Policy Issuance

Rates as of January 1, 1994

Remainder$440

B$550

A$550

C$495

D$495

Policy Issuance

Digitized Polygons/Rates

Terr. 3$440

Terr. 1$550

Terr. 2$495

Policy Issuance

GIS Places Insured in Territory

Terr. 3$440

Terr. 1$550

Terr. 2$495

Policy Issuance

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

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.

Data Collection/Analysis: Internal

Rates on January 1, 94 & 95

B$550

A$550

C$495

D$495

Remainder$440

Data Collection/Analysis: Internal

Remainder$440

Rates on January 1, 96, 97 & 98

Data Collection/Analysis: Internal

B$550

A$550

D$495C

$495

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.

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%

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%

Remainder83.3% 83.3% .80 .80 0%

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.

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.

Data Collection/Analysis: Internal

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

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.

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.

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).

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.

Data Collection/Analysis: External

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.