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The Impact of Catastrophic Claims on Workers Compensation Medical Loss Reserves
presented by
Bill Miller, FCAS, MAAA, Consultant Tillinghast - Towers Perrin
949/253-5242
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine2
Workers Compensation Catastrophic Claims
Catastrophic claims typically fall into four categories
Severe burn injuries
Acquired head injuries
Spinal cord injuries
Multiple trauma injuries
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine3
Workers Compensation Catastrophic Claims
Catastrophic claims deserve and receive special treatment
Less than 1% of claims, up to 20% of losses
Most carriers have special large claim units
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine4
Workers Compensation Catastrophic Claims
Catastrophic claims can have huge medical costs
Long term medical payouts
Particularly subject to the impact of future medical inflation
Changes in condition are difficult to anticipate and can have huge impacts on ultimate value of claim
Difficult to anticipate impact of future advances in medical technology on costs and life expectancy
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine5
Workers Compensation Catastrophic Claims
Examples of large loss development movement on catastrophic claims
Deterioration in condition partially caused by aging
Underestimation of life expectancy
Aging spouse can no longer provide home care
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine6
Workers Compensation Catastrophic Claims
Carriers and TPA’s have gotten better at handling and reserving these claims
In the past more reactive claims handling
Stair-stepping catastrophic case reserves was more common in the 70’s and 80’s
Life Care Plans currently developed by nurse case managers provide meaningful estimates of future costs considering all facets of claim
More proactive interaction now occurs with claimant, claimant’s family, medical provider
More consideration is now given to alternative living arrangements
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine7
Workers Compensation Catastrophic Claims
AccidentYear
Evaluation Age in Years RTR Factor
19 20
1980 $6 MM $6 MM 1.000
1981 $6 MM $8 MM 1.250
1982 $6 MM $6 MM 1.000
1983 $6 MM $6 MM 1.000
1984 $6 MM $6 MM 1.000
Average 1.050
AccidentYear
Evaluation Age in Years RTR Factor
19 20
1980 $6 MM $6 MM 1.000
1981 $6 MM $8 MM 1.250
1982 $6 MM $6 MM 1.000
1983 $6 MM $6 MM 1.000
1984 $6 MM $6 MM 1.000
Average 1.050
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
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine8
Workers Compensation Catastrophic Claims
Alternative reserving approach
Take out catastrophic claims
– Develop losses excluding catastrophic claims using more stable “excluding catastrophe claims” development patterns
– Tail factors much less difficult to project
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
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine9
Workers Compensation Catastrophic Claims
Alternative reserving approach (cont.)
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
CLRS0901A.PPT/sw/IrvineCLRS0901A.PPT/sw/Irvine10
Workers Compensation Catastrophic Claims
Long term medical inflation
Recent medical inflation has been low relative to historical levels
Managed care pendulum is swinging back
Long term care, pharmaceutical inflation well above average
Future medical advances
Increasing life expectancy
Possibility of future reform of medical care system