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

ESTIMATING THE WORKERS COMPENSATION TAIL 5814. Medical cost escalation rates and the force of mortalityare the key drivers of MPD tail factors. Unfortunately,the paid loss development method is not designed totreat these two influences separately. A method (incrementalpaid to prior open claim) is presented that providesfor the separate, explicit treatment of the effectsof these two drivers.5. In the early stages of the MPD tail, medical cost escalationoverpowers the force of mortality, leading toincreases in incremental paid losses and PLDFs.6. Assuming recent mortality rates, the incremental paidto prior open claim method fits the empirical data verywell out to DY 40, but then tends to understate lossesfor the next 15 DYs. This understatement is due to theadded costs of caring for the elderly, who make up arapidly increasing percentage of surviving claimants.7. The common actuarial assumption that the incrementalmedical severities for each claimant (at current costlevel) during each future DY will remain constant isnot valid. Such current level severities tend to increasenoticeably as each surviving claimant becomes elderly.8. Declining mortality rates have a substantial effect onmedical tail factors. Mortality improvement will alsocause individual PLDFs to trend upward slowly for anygiven DY.9. The common method of estimating the tail by applyingthe ratio of incurred to paid for the most matureaccident years will underestimate reserves, unless casereserves adequately reflect the implications of points 3,7, and 8. This is rarely the case.10. The most significant factor affecting the indications inthis paper is the applicable retention. Tail factors andPLDFs at more mature years of development should