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

628 ESTIMATING THE WORKERS COMPENSATION TAILWhile this dampening effect of retentions can obviously serveto greatly mitigate the magnitude of the applicable tail factors fordifferent insurers and self-insureds, this effect can rapidly dissipatewhen retentions rise significantly from year to year. It isquite common for insurers as well as self-insureds to significantlyincrease retentions when faced with costs for excess coveragethat have risen substantially as the market has hardened.The effect of recognizing the upward impact greater retentionswill have on assumed tails can be sizable.Other factors that can have a material impact on MPD tailfactors are the following:² The assumed future rate of medical cost escalation.² The observed tendency of medical losses to step up noticeablyas an increasing proportion of claimants become elderly.² The possibility that actual mortality rates of PD claimantsmight be higher (or lower) than those for the generalpopulace.² Variations in the gender mix and age-at-injury mix of PDclaimants.An entire paper could be devoted to quantifying the effectsthat changes in any or all of the above factors would have on indicatedtail factors. Of the above factors, the first two are the mostsignificant. While some believe that the long-term future rate ofmedical cost escalation will be less than the historical rate of 9%,others believe a constant 9% assumption is reasonable. Arguably,the differential between medical inflation and general inflationmay lessen over future decades. However, workers compensationmedical costs are a very small portion of total health costs,so a workers compensation medical escalation rate of 9% couldcontinue for a very long period of time without having mucheffect on the overall medical CPI or GNP. Furthermore, longtermgeneral inflation may move upward as a result of shortages