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Reserving Implications of Reform

Reserving Implications of Reform. Workers Compensation. David Mohrman John Booth. Topics. Characteristics of workers compensation Framework for analyzing workers compensation reforms Examples California Florida. WC Characteristics. Benefit structure defines how claims and losses emerge

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Reserving Implications of Reform

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  1. Reserving Implications of Reform Workers Compensation David Mohrman John Booth

  2. Topics • Characteristics of workers compensation • Framework for analyzing workers compensation reforms • Examples • California • Florida

  3. WC Characteristics • Benefit structure defines how claims and losses emerge • What’s covered • Amounts • Limits • Durations • Process • General characteristics of WC systems • Most claims reported quickly (OD) • Partial payments • Medical inflation • Long Tail

  4. WC Characteristics • As a result: • Quick picture of how many claims (lost-time/medical only) • Hard part is determining the cost… • Severe claims are often hard to identify quickly • … and how these claims will emerge

  5. FELA is an exception • Tort system – includes non economic damages, pain and suffering, etc. • More like general liability • Claims often reported late and many close with no benefit payment • Class action type suits (hearing loss, toxic exposure) • Adverse jury verdicts • No statutory changes or reforms, but court rulings/precedents can cause significant changes (“fear” of asbestosis for example). • Lump sum payments, short tail • Large variance in payments for similar accidents

  6. Measured by impact of reform on Frequency Severity Timing Reforms effect benefits: What’s covered Amounts Limits Durations Processes Basic Frameworks

  7. General Categories of Reforms: Statutory Benefits Wage replacement amounts Duration Other (apportionment, etc) Permanency Threshold Medical Provider choice / Networks Fee schedules Treatment guidelines / Limits on visits Adjudication / Dispute resolution / Administration Basic Frameworks

  8. Basic Frameworks • Initial post-reform reserves should be based on pricing analysis • Less help for open claims • Actual data should be incorporated as it emerges Reform effective date Severity data and Development data time Pricing analysis Frequency data

  9. Pricing analysis is good, but incomplete • Pricing analysis is a good place to start for changes in frequency and severity • Sometimes Impact on processes and utilization is wanting • Useful for setting initial reserve estimates • Loss ratios incorporating reforms, pricing changes and internal changes • Shortfall is on changes in development • Analysis of durations, if available can be converted to expected loss development • For reforms effecting claims retroactively, pricing analysis is usually of little help

  10. Pricing analysis should be adjusted for book of business • Reforms often have different impact by type of claim or payment • PTDs • Claim type shifts • Medical treatment/chiropractors • Medical costs • Attorney involvement • Managed care reforms effect depend on the intensity of current medical management activities • Claims department discussions are important for understanding the execution and measurement of reforms

  11. Claim frequency information can be incorporated relatively quickly • Changes in lost-time and medical-only claim activity can be measured quickly • Claim count emergence by type can be compared against the pricing analysis over a longer span • Has the emergence of claim counts changed? • Does frequency by claim type match expectations? • Has identification of problem claims become more or less difficult? • Use of Bornhuetter-Ferguson approach or frequency/severity approach is appropriate

  12. Actual claim severity and timing data should be incorporated as it emerges • Use of “operational” time instead of calendar time • Given milestones in the claim process how do results compare • With data prior to reform • With expected results post-reform • Basic concept of Berquist-Sherman approach • Analysis of closure rates and claim durations • Testing of development factors pre and post reform • Incurred and paid • Totals and average cost per claim • Loss development by injury type would be helpful

  13. Operational time example • Claim reporting • Speed-up in claim initial adjudication can be measured using accident month statistics • Observed speed-up averages 1 month • Implicit assumption is that claim adjusting is 1 month further along at any point in time • To analyze severity compare average incurred cost per claim post-reform at month = t to pre-reform lagged at month = t+1 • Comparison is useful for relative change, not absolute or ultimate differences • Good to use similar type claims (backs, PPDs,…)

  14. Reserving Implications in Florida • Industry impact estimated at -14% (per NCCI) • Impact is greatest on major claims PTD and PPD • Frequency change • Development change • Impact should vary by book of business • Construction vs service sector • Loss development by injury type or grouping would be useful • Need to track involvement of attorneys

  15. Reserving Implications in California • Reforms are designed to fundamentally alter behavior of key constituents (medical providers, claimants, judges, et al.) • Potential savings of 15% (per WCIRB not including impact of the permanent disability provisions effective in 2005) • Unintended consequences are expected, but unknown • Execution by insurers is key to savings potential • Expectation is that better ability to control treatment patterns will result in shorter durations • Limits on TTD treatments should also shorten durations • Apportionment should impact frequency and severity

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