Reserving Implications of Reform

1. Reserving Implications of Reform Workers Compensation David Mohrman John Booth

2. Topics • Characteristics of workers compensation • Framework for analyzing workers compensation reforms • Examples • California • Florida

3. 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

4. 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

5. 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 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

6. Measured by impact of reform on Frequency Severity Timing Reforms effect benefits: What’s covered Amounts Limits Durations Processes Basic Frameworks

7. 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 Basic Frameworks

8. 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 Frequency data

9. 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

10. 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

11. 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

12. 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

13. 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,…)

14. 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

15. 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