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Shared-Risk Insurance Pools for Transit Agencies: A Guide (2023)

Chapter: Chapter 4 - Continual Improvement

« Previous: Chapter 3 - Phases to Create and Operate a Transit Pool
Page 32
Suggested Citation:"Chapter 4 - Continual Improvement." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Page 32
Page 33
Suggested Citation:"Chapter 4 - Continual Improvement." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Page 33

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32 Responsible managers from the exploratory group to the board of the operating pool should be focused on the performance of the pool for its members and for their riders and public con- stituents. Periodic reviews by the service providers, including auditors and actuaries, should be directed toward these goals. Performance and trend analysis is a discipline to implement this focus, and degree of member satisfaction is a leading indicator of potential issues. 4.1 Performance and Trend Analysis The pool’s board and management firm should be familiar with the tools to determine a pool’s financial health. These financial benchmarks are the foundation of pool budgeting and business planning decisions. Pool management should continually monitor the pool’s financial statements to be aware of changes that could affect the pool over time. The financial ratios outlined in Table 6 are valuable tools for evaluating pool performance. In addition to the trailing indicators listed, leading indicators affecting pool performance must be monitored. These leading indicators may be economic factors that change before the rest of the economy begins to go in a particular direction that affect state budgets, and policy or organizational changes. 4.2 Member Satisfaction Strive to maintain a high degree of member satisfaction. Surveys can help the pool increase communication and service levels by evaluating its services against member expectations. A sample “member satisfaction” survey is provided in this Guide in Appendix D. 4.3 Conclusion All exposures to the risk of loss can be managed in a shared-risk pool. However, as predictabil- ity decreases, the risk of unexpected loss increases, requiring huge capitalization to pay for unex- pected loss. In other words, as the frequency of loss decreases and the severity of loss increases, loss becomes less predictable, requiring colossal capital commitments to prepare for loss. C H A P T E R 4 Continual Improvement

Continual Improvement 33   # Description Calculations 1 Pure Loss Ratio Incurred Losses/Earned Contributions 2 Loss Expense Ratio Incurred ALAE/Earned Contributions 3 Combined Ratio Pure Contribution + Load Factor/Earned Contributions 4 Investment Ratio Investment Income (Excluding Income on Contributed Capital)/Earned Contribution 5 Overall Operating Ratio Combined Ratio – Investment Ratio 6 Liquidity Ratio Liquid Assets (Cash, Bonds)/Liabilities Less Unearned Premium Reserves 7 Solvency Ratio #1 Net Contributions/Pool Surplus 8 Solvency Ratio #2 Pool Surplus/Net Loss Reserves 9 Total Return on Investment Total Return = [(Current Value – Cost Basis + Distributions)/Cost Basis] x 100 Key: 1. This ratio is an indicator of how successful the pool is with its underwriting activity. The lower the combined ratio, the more stable the pool is financially. Keep in mind the goal of the pool is to help its members meet their risk management goals and objectives, not to make a profit, so a combined ratio close to 100% may not be a bad thing. 2. This ratio indicates the efficiency of the pool investments to contribute to pool underwriting expenses. A high loss ratio can be an indicator of financial distress. The target should be 30% or less. 3. This ratio measures the pool’s overall operational solvency from underwriting and investment activities. The lower, the better; 100% of the above indicates a failure to collect sufficient contributions to cover the expected loss. 4. This ratio will depend on the state’s investment policy. 5. This ratio indicates whether a pool’s cash flow is sufficient to meet its short- and long-term obligations. The lower the ratio, the greater the probability of not meeting its obligations. The ratio should be one or greater. 6. This ratio determines a pool’s ability to pay its short-term debt obligations. 7. This ratio indicates whether a pool’s cash flow is sufficient to meet its long-term liabilities, and thus, measures its financial health. 8. This ratio indicates whether a pool’s cash flow from contributions is sufficient to meet its projected losses, and thus, measures its financial health. 9. This ratio is the actual rate of return on an investment or a pool of investments over a period. The total return is expressed as a percentage of the amount invested. Total return includes interest, capital gains, dividends, and realized distributions. Table 6. Pool financial ratio analysis.

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Transit agencies are finding it increasingly difficult to find, purchase, and maintain adequate and affordable insurance coverage for public transit vehicles. The number of smaller insurance providers is decreasing due to the volatile nature and demands of the insurance industry and insurance coverage requirements in general.

NCHRP Research Report 1079: Shared-Risk Insurance Pools for Transit Agencies: A Guide, from TRB's National Cooperative Highway Research Program, explains how insurance pools function, how to evaluate the feasibility of a shared-risk insurance pool, and how to establish and manage this type of pool.

Supplemental to report is a presentation and NCHRP Web-Only Document 374: Developing a Guide to Shared-Risk Insurance Pools for Transit Agencies: Conduct of Research Report.

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