Casualty Loss Reserve Seminar 2002 Session Number 2 - Workers’ Compensation Reserving – How and When Should You Slice the Cake? Timothy L. Wisecarver FCAS, FCA, MAAA September 23, 2002

2 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? WHY DO WE SLICE THE DATA CAKE? Emergence Patterns Settlement Patterns Development Patterns Loss Frequency Loss Severity Slicing Can Find and Use Differences in Data

3 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Factors Affecting Data Organization Decisions Availability Availability Credibility Credibility Homogeneity Homogeneity - Within a Slice - Within a Slice - Across Slices - Across Slices

4 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? RULES FOR THIS PRESENTATION Many Possible Slices are Shown Many Possible Slices are Shown Many Possible Slices are Not Shown Many Possible Slices are Not Shown Some Important Differences are Noted Some Important Differences are Noted Other Significant Differences are Not Noted Other Significant Differences are Not Noted “Factors Affecting Data Organization Decisions” are Assumed to Apply to All Slices “Factors Affecting Data Organization Decisions” are Assumed to Apply to All Slices

5 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Indemnityvs.Medical Differences Payment Computation Inflation Payment Timing Claim Mix Cost Containment Population Being Paid

6 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Benefitsvs. Loss Adjustment Differences Payment Computation Inflation Payment Timing Population Being Paid

7 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Indemnityvs.Medical-OnlyClaims (Medical Losses) Differences Payment Timing Cost Containment Medical Service Mix Injury Mix

8 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” VocationalRehabilitationvs. Other Indemnity Losses Differences Payment Computation Inflation Payment Timing Cost Containment Administration

9 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Branch Office orRegion Differences Administration Claims Personnel Industry Mix Injury Mix Economic Factors

10 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Case Reserver(s) Differences Accuracy Consistency Work Environment Caseloads Training Backlogs Case Mix

11 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Insurance Company Company Differences Book of Business Pricing Programs Expertise Cost Containment

12 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Self Insured Entity Individually Self Insured Individually Self Insured Member of Group Plan Member of Group Plan Differences Cost Containment Industry Injury Mix Administration Available Information Economic Factors

13 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Cost Containment PPOCCO Fee Schedule Market Differences Prices Inflation Payment Timing Injury Mix Loss Adjustment Risk Selection Service Complement

14 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Producer Differences Risk Selection Pricing Programs Industry Mix Injury Mix Service Complement

15 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” ReinsuranceArrangementsCededAssumed Differences Risk Selection Administration Claim Mix Cost Containment Coverage Terms

16 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Suggested “Slice”Self-InsuredAdministrationSelfTPA Differences Expertise Cost Containment Data Retrieving Ability Data Reporting Ability Motivation, Incentives Case Reserve Accuracy

17 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Suggested “Slice” Market Segment Voluntary Direct Assignment Servicing Carrier Differences Risk Selection Expertise Industry Mix Injury Mix Pricing Programs Motivation, Incentives Cost Containment

18 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” DeductiblesLargeSmallNone (Claim, Accident, Aggregate) Differences Inflation Payment Timing Case Reserve Accuracy Risk Selection Motivation, Incentives Cost Containment

19 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Suggested “Slice”Jurisdiction State Act (Which One(s)) USL&HWFELA Differences Benefit Levels Payment Computation Inflation Payment Timing Administration Cost Containment

20 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Suggested “Slice” Pricing Program(s) Guaranteed Cost Loss Sensitive Differences Risk Selection Cost Containment Market Conditions Motivation, Incentives

21 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Size of Loss Catastrophes Large Losses Other Losses Differences Case Reserve Accuracy Inflation Payment Timing Claim Mix Cost Containment

22 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Layer of Loss Layer of Loss Differences Inflation Case Reserve Accuracy Payment Timing Claim Mix Cost Containment

23 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Claim Status Open vs. Closed Differences Case Reserve Accuracy Payment Timing Claim Mix Cost Containment

24 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Traumatic Injury vs. Occupational Disease Differences Medical Service Mix Case Reserve Accuracy Payment Timing Claim Mix Cost Containment

25 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Suggested “Slice” Type of Injury DeathPermanent/Temporary Partial/Total Partial/Total Medical Only Differences Accuracy of Reserves Payment Timing Payment Mix Cost Containment

26 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Suggested “Slice” Special Accounts SizeManagement Business Activities Industry Segments Differences Risk Selection Case Reserve Accuracy Payment Timing Payment Mix Cost Containment

27 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data?

28 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense

29 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense Timing of Payments Timing of Payments

30 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense Timing of Payments Timing of Payments Recognition of Loss or Expense Recognition of Loss or Expense

31 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense Timing of Payments Timing of Payments Recognition of Loss or Expense Recognition of Loss or Expense Numbers of Claims Numbers of Claims

32 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense Timing of Payments Timing of Payments Recognition of Loss or Expense Recognition of Loss or Expense Numbers of Claims Numbers of Claims Average Loss or Expense Average Loss or Expense

33 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Amounts of Loss or Expense Amounts of Loss or Expense Timing of Payments Timing of Payments Recognition of Loss or Expense Recognition of Loss or Expense Numbers of Claims Numbers of Claims Average Loss or Expense Average Loss or Expense Loss or Expense per Exposure Unit Loss or Expense per Exposure Unit

34 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Matters in Our Data? Things That Affect: Things That Affect: Characteristics of a Book of Business Characteristics of a Book of Business Pertinent to Our Analytical Techniques Pertinent to Our Analytical Techniques or or Features of Specific Interest for Features of Specific Interest for Research, Management or Regulation Research, Management or Regulation

35 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? What Should We Pursue? Is the “Slice” Available? Is the “Slice” Available? How Important Is the “Slice”? How Important Is the “Slice”? What Will the “Slice” Cost? What Will the “Slice” Cost? Time Time Money Money

36 Casualty Loss Reserve Seminar 2002 How and When Should You Slice the Cake? Additional Potentially Useful Partitions of Workers Compensation Data (Suggested by CLRS Attendees)