PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

ESTIMATING THE WORKERS COMPENSATION TAILRICHARD E. SHERMAN AND GORDON F. DISSAbstractThe workers compensation tail largely consists ofthe medical component of permanent disability claims(MPD). Yet the nature of MPD payments is not widelyunderstood and is counter to that presumed in commonactuarial methods.This paper presents an analysis of medical paymentsbased on 160,000 permanently disabled claimants over77 accident years. It introduces a method for utilizingincremental payment data prior to the standard triangleto extend development factors beyond the end of thetriangle (for any casualty line).A model is presented that explicitly reflects the opposingeffects of medical cost escalation and the forceof mortality. It demonstrates that² paid loss development factors (PLDFs) tend to increaseover many successive, “mature” years of development,² PLDFs and tails will trend upward over time dueto expected future improvement in mortality–that is,people will be living longer, and² average medical costs for elderly claimants are substantiallyhigher than for younger claimants.The paper also demonstrates that case reserves basedon inflating payments until the expected year of deathare significantly less than the expected value of suchreserves. A method is introduced for realistically simulatingthe high expected value and variability of MPDreserves. It is based on a Markov chain model of annualpayments on individual claims.579