Loss Development in Workers Compensation in the Presence of Legislative Reform

Motivation: Legislative reforms affect loss development patterns in various ways. Some legislative innovations may affect new policy (or accident) years only, while others have diagonal effects as they affect both new and existing claims. Modeling these effects is critical for adequacy in ratemaking and reserving.

Method: Using a Bayesian state-space model, workers compensation triangles are developed subject to the applicable legislative stipulations. Most importantly, this model is capable of accommodating the legislative environment as it evolves over time.

Results: The model is applied to an unidentified state, which experienced a reform cluster in the period 1990/92. The model shows how this reform cluster affects the ultimate loss and the 19th-to-ultimate tail factors.

Conclusions: Ultimate losses are not only dependent on the legislative environment at time of loss, but are also affected by how this legislative environment evolves over time. The statistical model is capable of quantifying the effects of such legislative changes on the loss development pattern.

Availability: The model runs in OpenBUGS 2.2.0 (http://mathstat.helsinki.fi/openbugs/) within the R (www.r-project.org) package BRugs 0.3-3 (http://cran.r-project.org). OpenBUGS is administered by the Department of Mathematics and Statistics of the University of Helsinki, Finland; R is administered by the Technical University of Vienna, Austria. OpenBUGS and R are GNU projects of the Free Software Foundation and, hence, available free of charge.

Keywords: Workers Compensation, Trend and Loss Development, Reserving Methods.