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

ESTIMATING THE WORKERS COMPENSATION TAIL 665SECTION C.3. SELECTION OF REPRESENTATIVE VALUES OFINCREMENTAL PAID TO PRIOR OPEN CLAIMHistorical incremental paid to prior open claim averages weretrended to the calendar year 2003 cost level using an assumed annualmedical inflation rate of 9% per year. The resultant trendedaverages are displayed in Tables C.3.1 and C.3.2.SECTION C.4.BASIS OF 9% ASSUMPTION FOR FUTURE RATE OFMEDICAL COST ESCALATIONForecasts of future rates of medical cost escalation are basedon an analysis of actual medical severity since 1966. Future medicalseverity is expected to grow on average at the same rateobserved over this 38-year period. Internal studies have shownthat the best predictor of long-term medical cost escalation isthe long-term historical average itself. Short-term medical costescalation rates are more accurately predicted using shorter-termhistorical averages.In this paper we use an expected 9% future medical cost escalationrate. Intuitively, this rate might seem high, especiallywhen compared to the medical component of the CPI (Bureauof Labor Statistics). Table C.4.1 provides a historical comparisonof these two measures of change in average medicalcosts.SAIF’s average rate of medical cost escalation for 1983—1993was depressed by the effects of significant reform legislation enactedin 1990 and the introduction of managed care into workerscompensation. Absent these reforms, SAIF’s average differencefor 1983—1993 would have been similar in magnitude to the othermultiyear periods.It should be expected that a workers compensation insurer’saverage rate of medical cost escalation would exceed the aver-