Estimating the Workers' Compensation Tail

The workers’ compensation tail largely consists of the medical component of permanent disability claims (MPD). Yet the nature of MPD payments is not widely understood and is counter to that presumed in common actuarial models. This paper presents an analysis of medical payments based on 160,000 permanently disabled claimants--for accident years 1926-2002. It introduces a method for utilizing incremental payment data prior to the standard triangle to extend development factors beyond the end of the triangle. A close-fitting model is presented that explicitly reflects the opposing effects of l) medical cost escalation on average incremental payments, and 2) the force of mortality in closing claims. It clearly demonstrates that: * Paid development factors will tend to increase over many successive, "mature" years of development. * Paid development factors and tails will trend upward over time—if past declines in mortality rates continue in the future. The paper also demonstrates that case reserves based on inflating payments until the expected year of death are significantly less than the expected value of such reserves. A method is introduced for realistically simulating the high expected value and variability of MPD reserves. It is based on a Markov chain model of annual payments on individual claims.