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

586 ESTIMATING THE WORKERS COMPENSATION TAILin selecting a tail factor. Since this typically indicates a largertail (when there are open permanent disability claims), the actuarymay feel that reliance on this latter method will produce asafely conservative reserve estimate. However, such an estimateis only as unbiased as the MPD case reserves are. As will beshown later, MPD case reserves are particularly susceptible tounderestimation.Table 1.1 illustrates the hazards of attempting to extrapolatemedical paid loss development factors beyond DY 15 using acommon method (exponential decay), as applied to historicalPLDFs for DYs 10—15 (highlighted by a box) in Oregon, Washingtonand California.In Table 1.1, as well as throughout this paper, a PLDF for agiven DY is denoted by the maturity at the end of that year. Forexample, the factors in the row headed by “2” are for developmentfrom 1 to 2 years of age, since this is the second year ofdevelopment.In the lower portion of Table 1.1 these extrapolated factors aredirectly compared with known historical factors. In each state,the extrapolated factors increasingly fall below the historical onesfor later DYs. These persistent shortfalls are compounded whentail factors are calculated, such as those shown in the bottom rowof the table.Table 1.1 provides these comparisons for SAIF, the WashingtonDepartment of Labor and Industries (WA LNI) andthe California Workers Compensation Insurance Rating Bureau(WCIRB), respectively. The SAIF factors are for MPD only,while for the other two states, the factors are for total medical.So, everything else being equal, SAIF’s PLDFs will tend tobe greater for later DYs.The problem of persistent shortfalls in the extrapolated factorscan be reduced, but not eliminated, by applying inverse power[5] fits to the PLDFs for DYs 10—15. Such fits also assumethat PLDFs will decrease monotonically for increasing DYs. The