Jennifer:
At first glance your question generates two questions in my mind:
1. Are your trend factors appropriate?
2. Why trend (or detrend)?
First, let me state that I do not work with WC on a day to day basis, so
these responses are based on my interpretation of article in insurance
periodicals, syllabus readings and any other information I am able to
obtain. It has been about six or seven years since I have seen an NCCI
circular, so I don't know if what you are doing is something generally done
in WC. If my interpretations are incorrect, I'd appreciate any feedback
(as it may help me pass Part 6 on the fourth try). These are meerly the
reasoned opinions of a lowly student trying to slog his way through the
exams.
In regard to the first question, especially when dealing with WC, is a
single annual trend factor appropriate? With the many reforms enacted in
the past four or five years, it appears that claim cost trends have slowed
considerably in this decade. So, perhaps you should look at different
factors by year. Secondly, it may or may not be appropriate to apply the
same factors to the different limits. I believe that the general
impression is that trend on higher limits is greater than on lower limits,
certainly when looking at layers of loss (i.e., trend on 0-10k < trend on
0-25k < trend on 10k-25k). However, since you are detrending the limits,
I'm not sure if, or how this applies. Further, the difference in the trend
on 0-10k may not be significantly different from the trend on 0-25k. You
may want to investigate this in more detail. Finally, would it be more
appropriate to trend the losses to the 1997 level and then apply the caps
consistently? I don't know.
As for the second question, shouldn't trend and loss development be
considered independently? Is this a problem with the "overlap fallacy"?
(See "Trend and Loss Development Factors" by C. Cook in PCAS LVII, 1970.)
It's been a while since I've read this paper (I'm not sitting for Part 6
this May), so I don't know if there is an exception when losses are being
capped. I don't recall this being specifically addressed in the paper; I'm
unaware of any additional research in this area.
In summary, I guess I really haven't answered your question. Hopefully, I
have given you some things to consider, and just maybe, there will be more
discussion forthcoming.
(Embedded image
moved to file: jenbram@unicoverre.com
PIC28973.PCX) 03/16/98 04:14 PM
Please respond to casnet@lists.casact.org
To: casnet@lists.casact.org
cc: casnet@lists.casact.org (bcc: TC Bates/Westfield Companies)
Subject: WC Loss Development - Clarification
Just another quick clarification:
For accident year 1997, the losses are capped at $10,000 and then are
placed into development triangles.
For accident year 1990, the losses are capped at $10,000/(1.05^7)=$7,107
and then placed into development triangles.
After selecting the age-to-age factors, the Age-to-Ult. factors for the
losses limited to $10,000 were higher than the losses limited to $25,000.
Both used the same inflation index of 5%.
Jennifer Bramschreiber
Unicover Re
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