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Reserving Implications of Reform
Workers Compensation
David Mohrman
John Booth
September 13, 2004
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Topics
 Characteristics of workers compensation
 Framework for analyzing workers compensation
reforms
 Examples
 California
 Florida
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WC Characteristics
 Benefit structure defines how claims and losses emerge
 What’s covered
 Amounts
 Limits
 Durations
 Process
 General characteristics of WC systems
 Most claims reported quickly (OD)
 Partial payments
 Medical inflation
 Long Tail
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WC Characteristics
 As a result:
 Quick picture of how many claims (lost-time/medical
only)
 Hard part is determining the cost…
 Severe claims are often hard to identify quickly
 … and how these claims will emerge
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FELA is an exception
 Tort system – includes non economic damages, pain
and suffering, etc.
 More like general liability
 Claims often reported late and many close with no
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benefit payment
Class action type suits (hearing loss, toxic exposure)
Adverse jury verdicts
No statutory changes or reforms, but court
rulings/precedents can cause significant changes
(“fear” of asbestosis for example).
Lump sum payments, short tail
Large variance in payments for similar accidents
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Basic Frameworks
 Reforms effect benefits:
 What’s covered
 Amounts
 Limits
 Durations
 Measured by impact of
reform on
 Frequency
 Severity
 Timing
 Processes
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Basic Frameworks
 General Categories of Reforms:
 Statutory Benefits
Wage replacement amounts
Duration
Other (apportionment, etc)
 Permanency Threshold
 Medical
Provider choice / Networks
Fee schedules
Treatment guidelines / Limits on visits
 Adjudication / Dispute resolution / Administration
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Basic Frameworks
 Initial post-reform reserves should be based on pricing
analysis
 Less help for open claims
 Actual data should be incorporated as it emerges
Reform
effective
date
Severity data and
Development data
time
Pricing
analysis
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Frequency
data
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Pricing analysis is good, but incomplete
 Pricing analysis is a good place to start for changes in
frequency and severity
 Sometimes Impact on processes and utilization is
wanting
 Useful for setting initial reserve estimates
 Loss ratios incorporating reforms, pricing changes
and internal changes
 Shortfall is on changes in development
 Analysis of durations, if available can be converted
to expected loss development
 For reforms effecting claims retroactively, pricing
analysis is usually of little help
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Pricing analysis should be adjusted for book
of business
 Reforms often have different impact by type of claim or
payment
 PTDs
 Claim type shifts
 Medical treatment/chiropractors
 Medical costs
 Attorney involvement
 Managed care reforms effect depend on the intensity of
current medical management activities
 Claims department discussions are important for
understanding the execution and measurement of
reforms
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Claim frequency information can be
incorporated relatively quickly
 Changes in lost-time and medical-only claim activity
can be measured quickly
 Claim count emergence by type can be compared
against the pricing analysis over a longer span
 Has the emergence of claim counts changed?
 Does frequency by claim type match expectations?
 Has identification of problem claims become more
or less difficult?
 Use of Bornhuetter-Ferguson approach or
frequency/severity approach is appropriate
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Actual claim severity and timing data should
be incorporated as it emerges
 Use of “operational” time instead of calendar time
 Given milestones in the claim process how do
results compare
 With data prior to reform
 With expected results post-reform
 Basic concept of Berquist-Sherman approach
 Analysis of closure rates and claim durations
 Testing of development factors pre and post reform
 Incurred and paid
 Totals and average cost per claim
 Loss development by injury type would be helpful
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Operational time example
 Claim reporting
 Speed-up in claim initial adjudication can be
measured using accident month statistics
 Observed speed-up averages 1 month
 Implicit assumption is that claim adjusting is 1
month further along at any point in time
 To analyze severity compare average incurred cost per
claim post-reform at month = t to pre-reform lagged at
month = t+1
 Comparison is useful for relative change, not
absolute or ultimate differences
 Good to use similar type claims (backs, PPDs,…)
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Reserving Implications in Florida
 Industry impact estimated at -14% (per NCCI)
 Impact is greatest on major claims PTD and PPD
 Frequency change
 Development change
 Impact should vary by book of business
 Construction vs service sector
 Loss development by injury type or grouping would be
useful
 Need to track involvement of attorneys
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Reserving Implications in California
 Reforms are designed to fundamentally alter behavior of
key constituents (medical providers, claimants, judges, et
al.)
 Potential savings of 15% (per WCIRB not including impact
of the permanent disability provisions effective in 2005)
 Unintended consequences are expected, but unknown
 Execution by insurers is key to savings potential
 Expectation is that better ability to control treatment
patterns will result in shorter durations
 Limits on TTD treatments should also shorten durations
 Apportionment should impact frequency and severity
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