More than Meets the Eye

Claim Valuations and Settlements

Written by Kim Piersol FCAS, MAAA

Companies that self insure their workers’ compensation exposures, whether under a self insured retention, large deductible or an alternative funding program, must estimate the ULTIMATE future cost for both known and unknown losses. This valuation process must consider medical pension cases, including individual claim demographics and the effect of Medicare’s interest in workers’ compensation cases. A valuable tool in accomplishing this accrual analysis is an individual claim analysis that projects ultimate values after consideration of the many claim demographics which can affect this ultimate valuation.

A simple example will demonstrate the necessity to consider individual claim demographics in the valuation process. Two claims may exist for the same accident date with identical paid to date and case reserve amounts (i.e. the reported incurred losses are equal). “Traditional” valuation techniques will develop these claims to an ultimate basis identically by the same amount. However, upon closer examination, one claim may be for a 65 year old worker and the other one may be for a 25 year old worker with exactly the same disability. These claims will run off very differently not only because of the varying life expectancies based upon the mortality assumptions but also, and most importantly, because of the medical escalation trends which are built into the projection of future medical costs. The 25 year old may live another 50 years so we need to project what medical costs for this claim will be in the year 2062!! Also, if a claim settlement opportunity exists to settle these two claims, the claim on the 65 year old injured worker requires that the claim be submitted to CMS (Center for Medicare and Medicaid Services) for a Medicare Set-Aside (“MSA”) evaluation, which can have a significant impact on the ultimate claim settlement valuation.

Medicare’s interests in all workers’ compensation cases must be considered. An MSA will be required if the claimant is currently a Medicare beneficiary and the total settlement amount is greater than $25,000 or there is a “reasonable expectation of Medicare enrollment within 30 months of settlement date and the anticipated total settlement amount of future medical expenses and disability / lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000.” Consideration may be given to entering into an MSA arrangement to protect Medicare’s interests even though CMS will not be reviewing the proposal. Lately, self- insured entities have experienced unusually high MSA evaluations due to the high cost of prescription medications.

Regardless of the individual claim situation(s), the valuation of these claims requires close coordination and communication between the actuary, claims handler, and Medicare secondary payer compliance vendor. Since the individual claim valuations are so important to a self-insured entity (and their risk management process) from both a financial reporting and an insurance/reinsurance purchasing perspective, the company’s external auditor and insurance broker also may be consulted.

Individual claim demographics that need to be considered in individual claim valuations include:

o Life expectancy
o Gender
o Impaired/”Rated Age”
o Comorbidities
o Cost-of-living adjustments
o Medical escalation rates
o Probability that the claim will settle

In summary, a robust individual claim valuation model can be of great value to the individual self-insurer to derive expected outcomes using probability distributions based upon the above individual claim demographics. The overall results of these individual claim valuations can be utilized by the self-insurer for:

o Individual claim settlement negotiations (including discounted indications) o Commutation opportunities with the reinsurer(s)
o Loss portfolio transfers
o Financial reporting