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

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



Catastrophic claims deserve and receive special treatment

Less than 1% of claims, up to 20% of losses

Most carriers have special large claim units



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



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



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



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



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



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



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

Documents

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