Washington State Transit Insurance PoolTarget Fund Balance Review

Strictly Private and Confidential

Final Report PresentationSeptember 27, 2012

Target Fund Balance Process

1. Target Funding Statement

2. Review ALL major risks facing the pool

3. Review the pool’s own risk profile

• coverage, retention, risk management program, etc

• in contrast to formula approach

4. Risk Aggregation

• reflecting correlation

Business Model

Risk

Capital Requirements

2

PwCSeptember 27, 2012

3

Target Funding Statement

“We would like to have enough fund to protect our members from a 1-in-100 to 1-in-200 year event in the next year, under the current retention or the $5m liability retention”

3

Indicator

What are we measuring? (all

options eventually come back to fund

level)

Severity

What is the tolerable level of

this selected “indicator”?

Frequency

What is the tolerable frequency

that the selected indicator hits the selected severity

Time Horizon

What time horizon is the fund supposed

to protect?

Extremity

PwCSeptember 27, 2012

4

Major Risk Categories

What could deteriorate the current fund level?

Most of the asset and liability items are variable, as well as the profitability of the next year’s business, putting the total fund value at risk.

4

Asset Liability + Fund

County Investment Pool

$27.5m Unpaid Reserves $10.9m

Reinsurance recoverable

$0.7m Other Liabilities $0.3m

Other current assets $0.3m TOTAL LIABILITIES

$11.2m

Non-current assets $0.4m

Equity in reinsurer $1.2m TOTAL FUND $18.9m

TOTAL ASSET $30.1m

PwCSeptember 27, 2012

5

Major Risk Categories

5

Underwriting

Risk that the next year’s business

result may deviate from plan

• Catastrophic events

• Systemic losses

• Reinsurance cost

• Market cycle

• Price inadequacy, etc.

Reserving

Risk that the eventual loss &

expense may exceed booked reserves

• Excessive inflation

• Judicial environment on certain claim types

• Latent claims, etc.

Asset & Credit

Risk that the value of investment asset and receivables may

decrease

• County Investment Pool – exposed to interest rate risk and default risk

• Reinsurer failure

Operational

Any other unplanned expense that may arise from

operation

• External events such as an earthquake

• People related (turn over, fraud, reputational)

• System and process failure, etc.

Simulation based approach using historical data

Simulation based approach using historical data

Stress scenario test approach based on

discussions

Stress scenario test approach based on

discussions

PwCSeptember 27, 2012

6

Risk Aggregation

Once all the individual risks are quantified,

• We don’t simply sum across these numbers to get overall funding need, because this assumes that all those events are occurring at the same time (100% correlated), which is an unduly pessimistic assumption.

• Developed a correlation structure (between lines of business, and between risk categories, etc.) to reflect diversification and aggregated the funding level across those components.

6

AL GL

APD

Underwriting Reserving Asset & Credit Operational

Int. rate

Counter-

partyEquity

External

SystemPeopl

e

Total Funding Need

PR

AL GL

APD

PR

PwCSeptember 27, 2012

7

Risk Aggregation

Let’s discuss the level of correlation (degree of two things going bad together)

Asset & Credit Interest Rate Reinsurer failure

Interest Rate 100% Low

Reinsurer failure Low 100%

Risk Categories

UW Reserving Asset+ Credit

Operational

UW 100% High Med Med

Reserving High 100% Med Low

Asset+Credit

Med Med 100% Med

Operational Med Low Med 100%

PwCSeptember 27, 2012

8

High Level Study Result – Target Funding Range

Baseline ($1.5m liab/$250k prop)

$5m Retention $1.5m liab/$500k prop

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

Target (1-in-100 to 1-in-200 year event)

Current Funding

Reinsurance Arrangement

8

PwCSeptember 27, 2012

9

Heatmap

Property

1% of Fund

Need

28 % of

Premium

APD

5% of Fund

Need

76 % of

Premium

261% of

Reserves

GL

14% of Fund Need

204% of Premium

208% of Reserves

AL

67% of Fund Need

150% of premium

126% of Reserves

Reinsurer Relationship

6% of Fund Need

54% of GEM items on B/S

Investment in Bond

4% of Fund Need

3% of TCIP + LGIP

People

1% of Fund Need

System

1% of Fund Need

External

1% of Fund Need

UW and Reserving

87%

Asset and Credit

10%

Operational

3%

PwCSeptember 27, 2012

10

Application of Results to 2013 Rate Level Decision(assuming goal of supporting $5 million SIR)

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

Target Surplus Range Historical Fund Balance Regulatory Minimum ProjectedOption 1 - $266,000 Equity Option 2 - $3,600,000

Year End

PwCSeptember 27, 2012

11

Application of Results to 2013 Rate Level Decision(assuming goal of supporting current SIRs)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

Target Surplus Range Historical Fund Balance Regulatory Minimum ProjectedOption 1 - $266,000 Equity

Year End

PwCSeptember 27, 2012

12

Current Policy Guidance

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

Proj'd Losses Historical Fund Balance 1.5 times Reserves

5 Times SIR 10% Reduction in Equity Regulatory Minimum

10 times SIR

Year End

pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.