Texas Growth Through BonusesTeam #16 - Ahmed Abid, Adem Chaushev, Douglas Roach, Ana Vera

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Goal: 6,421 Additional Policies● December 2015: 128,411 IIF → December 2016: 134,832

○ Uneven Growth● Lower Loss Ratios

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Agent Bonus Structure Incentivises Growth● In order to receive the bonus, agents must:

○ Reach a set amount of additional policies (obtained through new applications and increased retention) determined by region

○ Maintain a Loss Ratio equal or lower to YE 2015

● Distribution of the bonus will be made one year in future to determine growth and discourage agents from processing high risk applicants

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Market Each Agent to Increase Books over December 2015 IIF by:

Decrease Loss Ratio from YE 2015 Loss Ratio by:

Amarillo 6.31% 0%

Fort Worth 4.24% 2%

El Paso 8.48% 0%

Austin 2.41% 0%

Dallas 6.44% 0%

San Antonio 3.59% 2%

Houston 0% 3%

Texas 5% 1%

In Order to Receive a 1% Commission Bonus:

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● 5% IIF Growth achieved

● Loss Ratio decrease of 1% mitigates added commission expense and higher liability

● If each agent succeeds at doing this, market overall will show this growth

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Growth by IIF

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5

IIF Growth Distribution

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Joe’s Story● Dallas Agent● YE 2015, his books showed:

○ 100 IIF○ Loss Ratio of 36

● YE 2016, they showed:○ 108 IIF○ YE 2016 Loss Ratio of 36

● 1% Commission Bonus Distributed Dec. 2017○ Met and exceeded Dallas’s Goal for IIF Growth (6.44%; at least 7 Additional Policies)○ Loss Ratio Changed by 0%

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Jane’s Story ● Houston Agent● YE 2015, her books showed:

○ 150 IIF○ Loss Ratio of 75

● YE 2016, they showed:○ 155 IIF ○ YE 2016 Loss Ratio of 73.5

● No Commission Bonus○ Met and exceeded Houston’s Goal for IIF Growth (0%; At Least 0 Additional Policies)○ Did not decrease Loss Ratio by 3% (72.75)

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We Determined the Criteria for the Bonus Program

Based on...

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IIF Growth Considered Loss Ratios

Inverse Relationship of Loss Ratios and IIF Growth in Some Areas

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Projected Growth Based on History11

Population Density shown by Region 12

IIF Growth--Absolute and Relative

● Some areas are not being asked to grow quite as much, either in absolute terms or relative to their 5Y Average Growth

● Thus, those regions are asked to lower their Loss Ratio

○ Makes each region’s goal a stretch

Market IIF Growth Growth over 5Y Average

Amarillo 6.31% 3.08%

Fort Worth 4.24% 3.85%

El Paso 8.48% 3.70%

Austin 2.41% 6.12%

Dallas 6.44% 4.69%

San Antonio

3.59% 3.34%

Houston 0% 1.73%

Texas 5% 4.06%

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Stretch Goals Make Bonuses Hard to Get and Profitable

Market Their Goal is a Stretch and Difficult to Achieve Because:

Amarillo 6.08% Growth in low population density area

Fort Worth Raising their Growth 3.85% over average and decreasing Loss Ratio by 2%

El Paso 8.48% growth in low population density area

Austin Raising their Growth 6.12% over average

Dallas Raising their Growth 4.69% over average

San Antonio Raising their Growth 3.34% over average and decreasing Loss Ratio by 2%

Houston Decreasing their Loss Ratio by 3%

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• Lowest Loss Ratio

• Only Loss Ratio that is steadily decreasing over the past 9 years

• It is one of two regions with an increasing IIF Growth Rate over the past 9 years

• Austin’s geographical position shows that it is not as susceptible to risk as compared to other regions like Houston.

• Large population provides room to grow

• High Population Densities

We See High Potential In Austin15

Why Increase Fort Worth by More than San Antonio?• Fort Worth has a steadier Growth Rate (although both are decreasing)

• Fort Worth also has more Yearly IIFs

• Fort Worth has a slightly lower Loss Ratio

• We believe Fort Worth’s geographic location is better than San Antonio’s

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El Paso will be Our Biggest Growth Factor• Highest growth rates, with 9 year high of 12.21% (YE 2006 - YE 2007)

• We will require El Paso to increase by the largest amount of IIFs (1,893)

• Low population density

• Mid-range Loss Ratio, but low population density can potentially be beneficial because of claims.

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Houston needs a helping hand• Highest loss ratio ( by over 20

compared to the second highest, Amarillo)

• History of Catastrophes

• Negative IIF Growth Rate

• Lowest IIFs despite having highest population

• Geographic location and high population density makes cats. more severe and frequent

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Future of this Growth

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Joe’s Future● Joe sold a policy in 2016 to a good customer, Jessica

○ Jessica renews her policy for 15 years

● In 2022, Hailstorm damages Jessica’s House● Interesting Problem:

○ Joe received bonus in 2017 for having additional “safe” policies on his books.

■ Policy was still a liability to the company.● Company still collects premium over the years

● Solution:○ Continue running the bonus program for years to come

■ Jessica’s Policy will increase Joe’s 2022 Loss Ratio● Joe loses the bonus in 2023

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New Growth Could Increase Loss Ratios Now and In Future

● Thus, we focused on Growth in low Loss Ratio Markets● Condition that Growth met with level or decreased Loss Ratio● Potential For Loss Ratio Spikes in Future

○ Higher IIF is a liability○ We suggest that this Bonus Program be run in the years following 2016

■ Different Criteria● More emphasis on decreased or level Loss Ratios● Less emphasis on Growth

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Managing Loss Ratio may Help Minimize Losses from Inevitable Claims due to Catastrophic Events

September–October 2011: Wildfire-Bastrop, Texas (Austin Region): The worst and most destructive wildfire in Texas history as it destroyed 1,691 homes, killed two people, and caused $325 million of insured property damage.

June 5, 2013: Hailstorm-Lubbock (Fort Worth Region): Baseball-size hail along with winds in excess of 90 mph caused more than $400 million in property damage in Lubbock. There were numerous reports of damage to homes, vehicles, as well as downed trees and power lines.

September 12, 2008: Hurricane Ike-Galveston (Houston Region): Damage was typical of a Category-3 or -4 storm, and collectively, damage amounts were near $14 billion

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Appendix

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● We used Excel’s Solver Function to model Projected Growth and Loss Ratios

○ This function takes in

constraints with an

objective and uses

algorithms to

determine growth

needed in each cell to achieve an objective.

Market IIF Constraints LR Decrease Constraints

Amarillo ≥ 21,109; ≤ 21,738

= 0%

Fort Worth

≥ 23,439 ≥ 2%

El Paso ≥ 23,387 = 0%

Austin ≥ 14,505 = 0%

Dallas ≥ 19,016 = 0%

San Antonio

≥ 19,939 ≥ 2%

Houston ≥ 9,339; ≤ 9,503 ≥ 3%

Texas ≥ 134,832 ≥ 1%

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AppendixData by Region

Amarillo5 Year Average growth 3.23%Peak Growth Rate 6.31% (YE 2006 - YE 2007)5 Year Average Loss Ratio 51.07 (growing on average by 1.10%) Total IIFs needed by YE 2016 to reach total Texas average of 5% 21,738 (additional 1,290 policies from 2015)

Fort Worth5 Year Average growth 0.38%Peak Growth Rate 0.81% (YE 2006 - YE 2007)5 Year Average Loss Ratio 39.10 (growing on average by 1.08%)Total IIFs needed by YE 2016 to reach total Texas average of 5% 24,339 (additional 990 policies from 2015)

El Paso5 Year Average growth 4.79%Peak Growth Rate 12.21% (YE 2006 - YE 2007)5 Year Average Loss Ratio 45.39 (growing on average by 0.98%)Total IIFs needed by YE 2016 to reach total Texas average of 5% 24,208 (additional 1893 policies from 2015)

Austin5 Year Average growth -3.70%Peak Growth Rate -3.38% (YE 2014- YE 2015)5 Year Average Loss Ratio 30.58 (growing on average by -0.94%)Total IIFs needed by YE 2016 to reach total Texas average of 5% 14,856 (additional 351 policies from 2015)

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Appendix

Dallas5 Year Average growth 1.74%Peak Growth Rate 6.94% (YE 2006- YE 2007)5 Year Average Loss Ratio 36.81 (growing on average by -0.10%Total IIFs needed by YE 2016 to reach total Texas average of 5% 19,586 (additional 1,185 policies from 2015)

San Antonio5 Year Average growth 0.25%Peak Growth Rate 1.51% (YE 2006 - YE 2007)5 Year Average Loss Ratio 40.32 (growing on average by 1.16%)Total IIFs needed by YE 2016 to reach total Texas average of 5% 20,603 (additional 714 policies from 2015)

Houston5 Year Average growth -1.73%Peak Growth Rate -1.52% (YE 2014 - YE 2015)5 Year Average Loss Ratio 75.90 (growing on average by 1.00%)Total IIFs needed by YE 2016 to reach total Texas average of 5% 9,503 (additional 0 policies from 2015)

Data by Region

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Appendix

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Reason to Grow Each Region by Our Chosen Percentage

AmarilloAmarillo is a region that has the ability to grow given their low population density, but since it has a low population in general, as well as a high loss ratio, the overall growth goal should be capped at the same growth rate through 2006-2015.

Fort WorthFort Worth we believe has the ability to increase more than it has in the past since it is a big region with a high population. Having a low loss ratio makes it a good region to grow.

El PasoEl Paso has proven to have the ability to grow significantly. It has a very high peak growth rate (12.21% - 2006). Also has a very high IFFs (second highest IIFs in Texas)

AustinWe are pushing Austin to grow heavily. Austin has the lowest loss ratio out of the 7 regions and is decreasing as well. Austin also has a high population and the growth rate is increasing over the years.

DallasDallas has shown it can grow at a strong rate. It has the second highest population as well as a high population density, but due to its geographic region it is not prone to many catastrophic events, shown through low loss ratio

San AntonioSan Antonio has the potential to grow in a similar manner to Fort Worth, but the geographical region suggests possible cat. risk such as Houston has being on the lower border of Texas.

HoustonWe capped Houston at 0 percent growth rate since it declining and there is much catastrophic risk exemplified by the highest loss ratio when having the highest population along with the highest gross average premium

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Appendix

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Appendix

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Bibliography● Slide 2- Growth- http://www.hscompanies.com/wp-content/uploads/2012/09/growth.png● Slide 2- Risk- http://uwf.edu/media/university-of-west-florida/offices/student-affairs

/sexual-violence/risk_reduction.jpeg● Slide 7- Male Insurance- http://www.calhisportsbayarea.com/wp-content/uploads/2014/09/mustafa.jpg● Slide 8- Female Insurance Agent- http://www.amisinsurance.com/images/slides/agent_broker_opportunity.jpg● Slide 12- Population Density- https://upload.wikimedia.org/wikipedia/commons/2/20/ES-Texas_Population_Density.png ● Slide 16- Why- http://2.bp.blogspot.com/-1dkbxvZ33qs/UX-oynmflMI/AAAAAAAAFac/MLXb9wS5qe8/s1600/big-why-question-daily-dividend-

passive-income-investor-seeks-consistent-returns-cash-flow.png● Slide 18- Hurricane Ike- http://texascoastgeology.com/Hurr%20Ike/Ike_sat.jpg● Slide 20- Hailstorm Damage- http://bloximages.chicago2.vip.townnews.com/missoulian.

com/content/tncms/assets/v3/editorial/5/53/55300604-df79-11e3-94e3-001a4bcf887a/537a3c895f01c.image.jpg● Slide 22- Significant Weather in the 2000s- http://texasalmanac.com/topics/environment/significant-weather-2000s● Slide 22- Significant Weather in the 2010s- http://texasalmanac.com/topics/environment/significant-weather-2010s● Slide 22- Managing Loss..-http://www.cnn.com/2015/10/15/us/bastrop-fire-texas-hidden-pines-wildfire/index.html● Slide 22- Managing Loss..- http://www.kcbd.com/story/22516604/severe-storm-damages-buildings-tears-down-power-lines-in-lubbock● Slide 22- Managing Loss- https://www.ldvusa.com/images/subImg290514023557037_Allstate_166319.JPG

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