Workers’ compensation claims provide a unique opportunity to utilize both “traditional” P&C and annuity actuarial concepts to provide a more accurate and intuitively appealing methodology to project needed reserves for workers’ compensation claim benefits which may have a lifetime exposure, e.g. indemnity benefits and unlimited lifetime medical benefits.
The “run-off” of these claims is, for all intents and purposes, “independent” of the historical paid and incurred development approaches; e.g. the loss development approaches do not “work.” As a result, Huggins Actuarial Services has developed an Individual Claim Simulation Model (“ICSM” or “the model”) that simulates probable outcomes and provides the insured/insurer/reinsurer with not only expected values but a range of outcomes expressed with confidence intervals for all retentions and/or ceded reinsurance layers. Also, the incremental annual paid loss projections of the ICSM produce a range of discounted cash flow indications for situations where loss discounting is permitted or present value results are needed, e.g. in a reinsurance/ individual claim commutation (settlement) or loss portfolio transfer situations. An additional “bonus” of the ICSM is that the selection of tail factors, which could go out for 50 years or more, is “avoided” and the development implied in the ICSM can be used to modify the “traditional” loss development triangles with development factors for the tail which are unique to the peculiarities of the individual insured/insurer/reinsurer.
The Workers’ Compensation Individual Claims Simulation Model simulates total needed reserves for those outstanding claims which may involve lifetime payments to a claimant. The model utilizes mortality tables to establish probabilities associated with the remaining life of each claimant. The model is set up so that a number of trials can be simulated. This is done because the ultimate value of each claim depends on various outcomes, each of which reflects an underlying probability distribution. If enough trials are simulated, the impact of the variability of these outcomes can be captured via a range of results.
A simple illustration will provide an example of the intuitive appeal of the ICSM
Two claims may exist for the same accident year with the exact same paid to date and case reserve (i.e. the reported incurred losses are equal). “Traditional” loss development techniques will develop these claims identically by the same amount. However, upon closer examination, one claim may be for a 55 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 life expectancy based upon the mortality assumptions but also, and most importantly, of the medical escalation trends which must be 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 2060.
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