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

CLRS0901A.PPT/sw/Irvine 1 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

CLRS0901A.PPT/sw/Irvine 2 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

CLRS0901A.PPT/sw/Irvine 3 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

CLRS0901A.PPT/sw/Irvine 4 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

CLRS0901A.PPT/sw/Irvine 5 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

CLRS0901A.PPT/sw/Irvine 6 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

CLRS0901A.PPT/sw/Irvine 7 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

CLRS0901A.PPT/sw/Irvine 8 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

CLRS0901A.PPT/sw/Irvine 9 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