Transcript Download Handout 2

The Impact of Catastrophic Claims on
Workers Compensation
Medical Loss Reserves
presented by
Bill Miller, FCAS, MAAA, Consultant
Tillinghast - Towers Perrin
949/253-5242
Workers Compensation Catastrophic Claims
Catastrophic claims typically fall into four categories
 Severe burn injuries
 Acquired head injuries
 Spinal cord injuries
 Multiple trauma injuries
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Workers Compensation Catastrophic Claims
Catastrophic claims deserve and receive special treatment
 Less than 1% of claims, up to 20% of losses
 Most carriers have special large claim units
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Workers Compensation Catastrophic Claims
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
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Workers Compensation Catastrophic Claims
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
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Workers Compensation Catastrophic Claims
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
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Workers Compensation Catastrophic Claims
Example of impact of catastrophic claims on loss
projections
Accident
Year
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
Average factor probably too low for years with catastrophic
claims, too high for years without them
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Workers Compensation Catastrophic Claims
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
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Workers Compensation Catastrophic Claims
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
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Workers Compensation Catastrophic Claims
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
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