Tillinghast–Towers Perrin Montana State Fund Loss Reserves Senate Bill 304 Study Committee September 23, 2003 Presented by: Robert F. Conger, FCAS, MAAA, FCIA Tillinghast – Towers Perrin 200 West Madison Street Suite 3100 Chicago, IL (312)

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Loss Reserves are an essential part of the sound financial management of a workers compensation insurance company n Definition n Why are Loss Reserves needed? n How are Loss Reserves determined? n Loss Reserve variability

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Loss Reserve — Defined n Funds that are earmarked for injured worker future benefits, where the injury has already occurred n Expect to use every dollar of the loss reserves to pay injured worker future benefits n Insurance companies also establish a “loss adjustment expense” reserve to provide for the ongoing expenses of administering the injured worker benefits

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Why are loss reserves needed? Employer purchases workers compensation coverage for all injuries that will occur in the coming year Employer pays premium to insurance company Employee injured at work Injury reported to employer and insurance company Initial medical care Wage replacement benefits begin (“indemnity”) In accordance with workers compensation statute … Medical care continues Wage replacement (‘indemnity”) benefits continue Throughout this period, the insurance company must hold the funds in reserve, so that the funds will be available to pay injured worker benefits /1 10/15–10/ Etc.

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Loss reserves are required by... n Good stewardship. The employer has entrusted these funds to the insurance company to pay for all current and future costs related to current year injuries n Sound financial management. Funds (premiums) were collected (from employers) for a specific purpose (paying benefits to injured worker), and should be set aside until this purpose is fulfilled n Actuarial standards and accounting principles. Insurance company must quantify and record the future cost of obligations for which it is committed n Law and regulation

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ – How are loss reserves determined? First, At The Individual Claim Level, By Quantifying The Likely Future Benefit Payments Based On: n Nature and severity of injury n Projected future medical care requirements for this worker n Estimated cost of providing that medical care n Anticipated degree and future duration of: n Total disability n Partial disability n When will the worker be able to return to partial employment? Full employment? n Future life expectancy n Pre-injury wage n Statutory workers compensation benefit specification n Dependents n How many, what type, ages

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Individual claim reserving, by itself, is not sufficient to quantify the insurance company’s total future obligation n Individual claim reserves are based on what is known today n Claimant medical condition, medical requirements, and limitations on ability to work are subject to change n Cost implications of evolving medical technology and medical inflation can’t be estimated reliably for an individual claim n Some injuries may not have been reported yet to the insurance company, or information and determinations may be incomplete n Previously closed claims may reopen

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ – How are loss reserves determined? Actuaries Analyze Overall Loss Reserve Needs For Large Groups Of Injured Workers By Analyzing And Projecting Historical And Current Patterns Of: n Claim reporting, claim closing, claim reopening n Types and amounts of benefits currently being paid n Changes in types and amounts of benefit payments as a population of injured workers ages n Medical costs and medical inflation n Effects of statutory benefit changes and judicial interpretations of benefits By applying these patterns to current groups of injured workers, the actuary projects the total future payout of benefits for injuries that have occurred in the past

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Loss reserves are estimates, and are subject to significant variability n Changing medical inflation n Other economic conditions n Medical technology and medical practices n Medical condition of injured workers n Speed of partial and full return to work n Judicial interpretations of benefits

Tillinghast–Towers Perrin S:Shared/03prg/03prggr/Montana LReserves.ppt/CHO/ Questions?