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.