Levels of Determinism in Workers' Compensation Reinsurance Commutations

When commuting workers' compensation reinsurance claims, the standard method is to project the future value of the claims using stated assumptions for future medical usage, medical inflation, COLA's and investment income. The actuary selects a best guess for each variable, and assumes this deterministic number will be realized in the future. To account for the date of death being stochastic, a mortality table is used to model the future lifetime. By assuming deterministic values for future medical usage, medical inflation, COLAs, and investment income, the calculation ignores the possibilities of higher or lower values. By removing deterministic assumptions from the calculation, bias is removed from the results. The paper gives a detailed, realistic, example to illustrate this. Other keywords: reserving, loss distributions, modeling.