Managing Workers' Comp Catastrophic Claims - Strategies and Best Practices

1. The Impact of Catastrophic Claims on Workers Compensation Medical Loss Reserves presented by Bill Miller, FCAS, MAAA, Consultant Tillinghast - Towers Perrin949/253-5242

2. Workers Compensation Catastrophic Claims • Catastrophic claims typically fall into four categories • Severe burn injuries • Acquired head injuries • Spinal cord injuries • Multiple trauma injuries

3. 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

4. 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

5. 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

6. 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

7. Workers Compensation Catastrophic Claims • 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

8. 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

9. 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

10. 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