Workers Compensation: Issues and Challenges WC Industry Reserve Adequacy

1. Workers Compensation: Issues and ChallengesWC Industry Reserve Adequacy Barry Lipton, FCAS, MAAA barry_lipton@ncci.com Casualty Loss Reserve Seminar September 13-14, 2004

2. 2 Overview of NCCI Analysis Computations based on Schedule P Accident Year data Industry-wide private carrier reported losses and LAE Analyze and select paid, paid+case, and incurred loss+LAE development factors Analyze ultimate loss projections and select final estimate of ultimate incurred losses and LAE Redundancy or Deficiency = Reported - Selected Ultimate Schedule P data � AY data, net of reinsurance Industry-wide losses: paid, case incurred and IBNRSchedule P data � AY data, net of reinsurance Industry-wide losses: paid, case incurred and IBNR

3. 3 Challenges in Estimating Industry Reserves Changes in reinsurance use and limits Changes in size and use of large deductibles. Changes in market composition due to mergers, insolvencies, etc. Possible changes in closing rates Development beyond 10th report (tail) is difficult to project

4. 4 Improvements and Additions Modeled impact of changes in reinsurance and large deductibles on loss development patterns. Matching carrier data used to address high variability in development patterns caused by mergers & insolvencies. Claim diagnostics analyzed including claim closing rates Adjusted tail factor to reflect reinsurance usage and limits Bornhuetter-Ferguson method employed for the first time Schedule P data � AY data, net of reinsurance Industry-wide losses: paid, case incurred and IBNR Dropped paid to a 4th development methodSchedule P data � AY data, net of reinsurance Industry-wide losses: paid, case incurred and IBNR Dropped paid to a 4th development method

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