The Impact of Catastrophic Claims on Workers Compensation

The Impact of Catastrophic Claims on Workers Compensation Medical Loss Reserves presented by Bill Miller, FCAS, MAAA, Consultant Tillinghast - Towers Perrin 949/253 -5242

Workers Compensation Catastrophic Claims Catastrophic claims typically fall into four categories l Severe burn injuries l Acquired head injuries l Spinal cord injuries l Multiple trauma injuries CLRS 0901 A. PPT/sw/Irvine 1

Workers Compensation Catastrophic Claims Catastrophic claims deserve and receive special treatment l Less than 1% of claims, up to 20% of losses l Most carriers have special large claim units CLRS 0901 A. PPT/sw/Irvine 2

Workers Compensation Catastrophic Claims Catastrophic claims can have huge medical costs l Long term medical payouts l Particularly subject to the impact of future medical inflation l Changes in condition are difficult to anticipate and can have huge impacts on ultimate value of claim l Difficult to anticipate impact of future advances in medical technology on costs and life expectancy CLRS 0901 A. PPT/sw/Irvine 3

Workers Compensation Catastrophic Claims Examples of large loss development movement on catastrophic claims l Deterioration in condition partially caused by aging l Underestimation of life expectancy l Aging spouse can no longer provide home care CLRS 0901 A. PPT/sw/Irvine 4

Workers Compensation Catastrophic Claims Carriers and TPA’s have gotten better at handling and reserving these claims l In the past more reactive claims handling l Stair-stepping catastrophic case reserves was more common in the 70’s and 80’s l Life Care Plans currently developed by nurse case managers provide meaningful estimates of future costs considering all facets of claim l More proactive interaction now occurs with claimant, claimant’s family, medical provider l More consideration is now given to alternative living arrangements CLRS 0901 A. PPT/sw/Irvine 5

Workers Compensation Catastrophic Claims Example of impact of catastrophic claims on loss projections Average factor probably too low for years with catastrophic claims, too high for years without them CLRS 0901 A. PPT/sw/Irvine 6

Workers Compensation Catastrophic Claims Alternative reserving approach l Take out catastrophic claims – Develop losses excluding catastrophic claims using more stable “excluding catastrophe claims” development patterns – Tail factors much less difficult to project l Separately project catastrophic claims losses – For known claims, rely on Life Care Plan estimates – For IBNR claims, analyze reported catastrophic claim count triangles to project IBNR counts – Use long-term inflation adjusted catastrophic claim severity CLRS 0901 A. PPT/sw/Irvine 7

Workers Compensation Catastrophic Claims Alternative reserving approach (cont. ) l Advantages of this approach – Mitigates problem of applying same tail factor to all years, regardless of presence or absence of cats – Gets actuary talking to claims personnel on these big important claims and focusing on their possible impact on reserving methods – Allows for sensitivity testing of various medical inflation assumptions on ultimate cost – Understanding adequacy and volatility of case reserves on these claims is key to best practices reserving CLRS 0901 A. PPT/sw/Irvine 8

Workers Compensation Catastrophic Claims Long term medical inflation l Recent medical inflation has been low relative to historical levels l Managed care pendulum is swinging back l Long term care, pharmaceutical inflation well above average l Future medical advances l Increasing life expectancy l Possibility of future reform of medical care system CLRS 0901 A. PPT/sw/Irvine 9