Casualty Loss Reserve Reserve Seminar September 23-25, 2002 Workers’ Compensation Reserving: How and When Should You Slice the Cake? Arthur I. Cohen ACAS, MAAA Ernst & Young LLP

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Dealing with the Imperfect Cake (War Stories from the Front Lines) Mudpies Crumbs Unfilled Pie Crusts

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Government Entity  Approximately 40 Dissimilar Agencies (Judiciary, Military, Transportation, etc.)  Size Varies Greatly Between Agencies  Individual Agency Size Varies Greatly Between Years.

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Data Readily Available:  10 Calendar Years of Aggregate (All Agencies Combined) Incremental Payments by Injury Year, Indemnity v. Medical, for latest 40 Injury Years  5 Calendar Years of Payments by Agency

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Data Unavailable:  No Case Reserves  No Injury Type Designation (Permanent Total, Permanent Partial, Temporary Total, etc.)  No Paid Data Prior to Latest 10 Calendar Years

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Historic Model:  Aggregate Liability Projection Stable (Decay Model)  Agency Liability Allocation Highly Unstable (Allocation Based on Calendar Year Payments)

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Additional Data Available:  6 Calendar Years of Agency Incremental Payments by Injury Year, Indemnity v. Medical  Duration Studies Reflecting Claim Characteristics  Nature of Injury  Body Part

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Additional Data Available:  Claimant Demographics -Birthdate -Current Payments -Nature of Injury -Injury Date -Accident Cause - Body Part -Sex -Accident Nature  Anecdotal Information –Agency Operations –Agency Cost Control Initiatives –Alternative Duty Programs

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Issue: How to Segregate Agencies into Homogeneous Groups of Credible Size?

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #1 - Governmental Entity Solution:  Creation of 5 Agencies Groups, Each Consisting of 1 to 23 Individual Agencies  Analysis by Agency, Supplemented by Agency Group Data

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #2 - Monopolistic System State Act:  Insureds  Self-Insureds (Contingent Liability) Federal Black Lung Act (Competitive)  Insureds

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #2 - Monopolistic System  Data by Injury Type Fatal and Permanent Total Disability  Historic Claim Counts  Accurate Case Reserves Permanent Partial, Temporary Total, Medical  Historic Paid Losses  Case Reserves Do Not Reflect Additional Awards

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #2 - Monopolistic System Major Issue: Change  Legislative  Judicial  Claims Management

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake. Scenario #2 - Monopolistic System Impact of Change by Injury Type Varies Regarding:  Frequency  Weekly Benefit  Payment Inception  Duration

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake Scenario #2 – Monopolistic System Obvious Slices State Act v. Federal Insured v. Self-Insured Injury Type Accident Period (Applicable Benefit Structure, etc.)

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake Scenario #2 – Monopolistic System Additional Considerations:  Inconsistent Application of Legislation and Judicial Decisions by Claims Personnel Regarding:  Escalation  Duration  Fee Schedules  etc.  Inconsistent Accident Year Coding:  Injury Date  Onset Date  Award Date

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake Scenario #2 – Monopolistic System Additional Considerations:  Loss of Integrity of Insured v. Self-Insured Allocation  Leasing Companies  Accident Year Issues

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake Scenario #2 – Monopolistic System Issue: Slices are not Clean

Casualty Loss Reserve Seminar 2002 Workers’ Compensation: Slicing the Cake Scenario #2 – Monopolistic System Solution:  Use “obvious” data slices.  Give Full Consideration to Data Issue, Using Conservatism in the Face of the Unknown