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

584 ESTIMATING THE WORKERS COMPENSATION TAILIntroductionThe workers compensation tail behaves quite differently fromthat of any other casualty line. For other lines, it is virtuallyaxiomatic that PLDFs will decrease monotonically to 1.0 forlater DYs. In sharp contrast, PLDFs for MPD payments quiteoften increase for later DYs.The payout pattern for MPD losses is a composite of tworadically different types of payments: short-term and lifetime.What separates these two types is how long work-related medicalpayments continue. Short-term payments cease well beforethe claimant dies, either because the need for periodic medicaltreatments ceases or because the claimant returns to work. Lifetimepayments, on the other hand, persist until the claimant dies.Figure 1.1 contrasts these payout patterns. These two categoriesare conceptual, to help in understanding the behavior of workerscompensation payments over time, rather than practical, sinceMPD payments cannot be precisely separated into these two categoriesuntil all claimants die. As such, precise categorizationrequires hindsight on an ultimate basis.From Figure 1.1, we see that short-term payments overshadowlifetime payments during the first 10 or so DYs, and lifetimepayments dominate soon after that. PLDFs for successive DYsduring DYs 3 through 15 tend to drop, largely because of thecessation of short-term payments for a significant percentage ofclaimants during each DY. For later DYs, the predominant influenceaffecting whether PLDFs increase or decrease is the relativemagnitude of the force of medical cost escalation versus that ofclaimant mortality, since death is virtually the sole reason for theclosure of claims.An MPD payment history is the result of the sum of the abovetwo payout patterns. As is evident, this will be a bimodal pattern,peaking during DY 2 and around DY 40. If total medical or totalworkers compensation paid experience is all that is available, thesecond peak will be much less evident, to the point where the