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

580 ESTIMATING THE WORKERS COMPENSATION TAIL1. SUMMARY AND INTRODUCTIONHistorically, the ability of workers compensation insurers toreasonably estimate tail factors has been hampered by a dearth ofavailable development experience at maturities beyond 10 to 20years. Substantive advances in workers compensation tail estimationdepend on the availability of a substantial database extendingto 50 or more years of development.This paper presents the results of a thorough analysis of theextensive paid loss development database of the SAIF Corporation,Oregon’s state fund. This database extends out to 77 yearsof development separately for medical and indemnity, and separatelyby injury type (i.e., permanent total, permanent partial,fatal, temporary total, temporary partial, and medical only).This paper predominantly focuses on the behavior of medicalpayments for permanently disabled claimants (MPD) on anunlimited basis. Some of the key findings from this analysis ofMPD payments include the following:1. MPD tail factors calculated empirically are significantlygreater than those derived from extrapolation techniques.This occurs because MPD paid loss developmentfactors (PLDFs) do not decrease monotonicallyfor many later development years (DYs).2. There is an effective, systematic way (the Mueller IncrementalTail method) to utilize incremental paymentdata prior to the standard triangle to extend PLDFs beyondthe end of the triangle for any casualty line.3. Medical cost escalation rates have generally been muchhigher than annual changes in the medical componentof the Consumer Price Index (CPI). Medical cost escalationrates include increases in utilization rates ofdifferent services and the effects of shifts in the mix ofservices toward more expensive care alternatives.