Moore: Huge Hidden Effect of Catastrophic Claims

Tuesday, March 14, 2023 | 0

Mark Walls of Safety National and the Work Comp Analysis Group on LinkedIn posted quite interesting articles over the last two weeks on the hidden effect of catastrophic workers' comp claims. Check out this article in Carrier Chronicles.

James Moore

Reading the article will be worth your time. I guarantee it.

The National Council on Compensation Insurance, Worker’s Compensation Insurance Rating Bureau and all the other workers' comp rating bureaus have published presentations and articles on catastrophic workers' comp claims. WCRI (not a rating bureau) out of Cambridge, Massachusetts, has also covered this subject. 

What caught my eye

As the above article astutely points out:

It is important to note that bureaus like NCCI and WCIRB focus their research on the first-dollar market, which is comprised of a high percentage of small employers. These bureaus cap loss severity in their analysis and exclude claims that are open past 10 years. This approach does not accurately account for the long tail development and payout associated with catastrophic claims, which continue well past 10 years. In addition, self-insured employers that represent a significant percentage of the U.S. workforce, especially in segments such as public entities, hospitals, educational institutions and large employers, generally do not report loss information to the NCCI or state rate-making bureaus.

"Exactly" is all that I can say about the above passage. 

Loss triangles and catastrophic claims

The article also refers to long-tail claims development. That is why I use and am an advocate of the sum of least squares. I know that might sound like more statistical jargon, but I like to look at a set of claims over 20 years, which is a normal business cycle. Follow the last link to the article that covers the subject. 

I have made actuaries mad at me for that article. Mark Walls’ group is talking about even longer time spans that the sum of least squares often referred to as linear regression can handle to infinity. By the way, all spreadsheet apps have regression built into them, including Excel’s Statistical package. 

Bottom line

Claims that stretch beyond 10 years are becoming more frequent every year. The Safety National article called it severity frequency. Catastrophic workers' comp claims are going to grow over the next few years and decades.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.