Estimating the Workers Compensation Tail

The workers compensation tail largely consists of the medical component of permanent disability claims (MPD). Yet the nature of MPD payments is not widely understood and is counter to that presumed in common actuarial methods. This paper presents an analysis of medical payments based on 160,000 permanently disabled claimants over 77 accident years. It introduces a method for utilizing incremental payment data prior to the standard triangle to extend development factors beyond the end of the triangle (for any casualty line). A model is presented that explicitly reflects the opposing effects of medical cost escalation and the force of mortality. It demonstrates that: --paid loss development factors (PLDFs) tend to increase over many successive, “mature” years of development, --PLDFs and tails will trend upward over time due to expected future improvement in mortality–that is, people will be living longer, and --average medical costs for elderly claimants are substantially higher than for younger claimants. The paper also demonstrates that case reserves based on inflating payments until the expected year of death are significantly less than the expected value of such reserves. A method is introduced for realistically simulating the high expected value and variability of MPD reserves. It is based on a Markov chain model of annual payments on individual claims.