Workers Comp. Reserving - How and When Should You Slice the Cake?

1. Workers Comp. Reserving - How and When Should You Slice the Cake? Mark J. Mahon, FCAS, MAAA MBA, Inc. CLRS - September 23, 2002

2. It’s Easy to Want the Data - Receiving It Is Not So Easy • To Start - Keep Things Simple

3. It’s Easy to Want the Data - Receiving It Is Not So Easy • To Start - Keep Things Simple • Follow the Client’s Operations

4. It’s Easy to Want the Data - Receiving It Is Not So Easy • To Start - Keep Things Simple • Follow the Client’s Operations • Why Do You Want the Data?

5. It’s Easy to Want the Data - Receiving It Is Not So Easy • To Start - Keep Things Simple • Follow the Client’s Operations • Why Do You Want the Data? • Time Consuming and Expensive

6. Traumatic vs. Occupational Disease (Black Lung) • Coal Mine Compensation Rating Bureau of Pennsylvania.

7. Traumatic vs. Occupational Disease (Black Lung) • Comparison of OD to Traumatic • Cumulative

8. Traumatic vs. Occupational Disease (Black Lung) • Comparison of OD to Traumatic • Cumulative • Long Report Time

9. Traumatic vs. Occupational Disease (Black Lung) • Comparison of OD to Traumatic • Cumulative • Long Report Time • Claims take time to Adjudicate

10. Traumatic vs. Occupational Disease (Black Lung) • Comparison of OD to Traumatic • Cumulative • Long Report Time • Claims take time to Adjudicate • Lifetime Benefits

11. Traumatic vs. Occupational Disease (Black Lung) • Comparison of OD to Traumatic • Cumulative • Long Report Time • Claims take time to Adjudicate • Lifetime Benefits • Low Frequency/High Severity

12. The OD System • Frequency times Severity.

13. The OD Frequency • IBNR Claims • Uses Typical Accident Year Triangles • Claims assigned to Year based on Last Date of Exposure • Claim Count Development used to estimate IBNR Claims

14. OD Frequency • Three Pieces • Known Claimants Receiving Benefits at the valuation date (Awarded Claims) • An Estimate of Pending Claims that will be Awarded • An Estimate of IBNR Claims that will be Awarded

15. The OD Frequency • Awarded Claims

16. The OD Frequency • New Federal Black Lung Legislation • Increase in Reported Claims • Increase in Awarded Claims • Retroactive

17. OD Severity • Life Tables • Lifetime Benefits • Claimant’s Age • Annual Benefits • Marital Status • Escalation (State - No, Federal- Yes)

18. OD Severity • Life Tables used to Model Future Benefits

19. OD Severity • Act 57 • Only Claims Filed After Mid 1996 • WC Benefits Reduced for Social Security • WC Benefits Reduced for Pensions • AMA Guidelines Made it Harder To Achieve PT Disability Status

20. The OD Reserve • Three Pieces • Known Awarded Claims: • Sum of Each Claimant’s future payments from severity model • Pending Claims: • Pending Claims x Award Ratio x Average Severity of Pending Claims • IBNR Claims: • IBNR Claims x Award Ratio x Average Severity of Awarded and Pending Claims

21. OD System - Concluding Remarks • Lifetime Payments/Long Tail

22. OD System - Concluding Remarks • Lifetime Payments/Long Tail • Relatively Few Claims

23. OD System - Concluding Remarks • Lifetime Payments/Long Tail • Relatively Few Claims • Parallels Actual Process

24. OD System - Concluding Remarks • Lifetime Payments/Long Tail • Relatively Few Claims • Parallels Actual Process • Reviewed by Interested Parties

25. OD System - Concluding Remarks • Lifetime Payments/Long Tail • Relatively Few Claims • Parallels Actual Process • Reviewed by Interested Parties • Expensive

26. OD System - Concluding Remarks • Lifetime Payments/Long Tail • Relatively Few Claims • Parallels Actual Process • Reviewed by Interested Parties • Expensive • Is This Really the Only Way to Make Estimates?

27. Traumatic - Indemnity vs. Medical • Very Common Split • Also Breakdown Medical into Medical Only and Medical on Indemnity • Different • Development • Inflation • Law Changes

28. Tail Factor -Inverse Power Curve

29. Tail Factor -Relate to Larger Body

30. Tail Factor -Decay Factor

31. Traumatic Losses By Injury Type • Death, Permanent Total, Permanent Partial and Temporary Claims

32. Traumatic Losses By Injury Type • Death, Permanent Total, Permanent Partial and Temporary Claims • Proportion of Losses by Injury Type • Act 57 Impacts Largest Claims • Severity Subsequent to Law Change should be Smaller

33. Traumatic Losses By Injury Type • Permanent Total Claim Count Development

34. Traumatic Losses By Injury Type • PT Count Development after Act 57

35. Traumatic Losses By Injury Type • Act 57 Also made it Easier to Settle Claims • Fewer Claims Being Reported as PT • Retroactive - Existing PT’s Settled and Reclassified

36. Traumatic Losses By Injury Type • Reserve Estimation – Be Careful • Incurred Loss Triangles Double Count Impact of Settlements Understating Reserve Need • Paid Triangles Overstate Reserve Need

37. Traumatic Losses By Injury Type • Safety Program Impact • Drop in Number of Injuries • Shift to less Severe Accidents

38. Losses in Higher Layers • Be Careful - Reserves in Higher Layers may be Inadequate • Loss Development Under Estimates Higher Layers in Most Recent AY • Immature years don’t yet have any big losses • Change in claims handling • Historically there are no Higher Layer Losses in layer but because of new severe classes or inflation new losses are expected

39. Latest Years’ Lower than Historical Losses in Higher Layers

40. Immature Years have No Losses Losses in Higher Layers

41. Losses in Higher Layers • Use Industry Statistics to Fill-in Excess Losses • Payroll x Loss Cost x Excess Loss Factor • As AY matures rely on actual data more and more • For Insurers Do Gross, Ceded and Net Separately

42. Losses By Business Segment • Many Self-Insureds have Different Operating Units • E.g., Construction vs. Shipbuilding • Financial Data Already Split • Usually Easy to get Actuarial Data as Coding already there

43. Losses By Business Segment • Many Self-Insureds have Different Operating Units • E.g., Construction vs. Shipbuilding • Financial Data Already Split • Usually Easy to get Actuarial Data as Coding already there • Data by Jurisdiction • USL&H Benefits Higher than State Benefits

44. Combining Data • Increases Credibility for Companies with Sparse Data

45. Combining Data • Increases Credibility for Companies with Sparse Data • Provides a Guide to Overall Level

46. Combining Data • Increases Credibility for Companies with Sparse Data • Provides a Guide to Overall Level • Use Combined Data as Minimum as usually the Sum of the Slices are greater than the Total • Less Variation in Total • Smaller Slice with Tail muted by Larger Slice without Tail • Shifting Losses to Longer Tail Slice

47. Keeping Score • Purpose of Slices - Improve Reserve Estimation Accuracy • Keep Tabs on your Estimates - Keep A Scorecard

48. Keeping Score

49. Keeping Score • Keep Score of Your Estimates

50. Workers Comp. Reserving - How and When Should You Slice the Cake? Mark J. Mahon, FCAS, MAAA MBA, Inc. CLRS - September 23, 2002