Grabbing Hold of the Tail

Thursday, May 5, 2011 | 0

By Bill Zachry
Safeway Inc.

This missive is intended for the actuaries in my audience. It's regarding "Estimating the Workers' Compensation Tail," a 2004 report by Richard E. Sherman and Gordon F. Diss (available on the Casualty Actuarial Society's website).

I found the paper very useful, but also I feel that it does not really explain some of the potential underlying reasons for the length and costs of the workers' compensation "tail."

In workers' comp insurance, a tail is the length of time it takes to completely close all the claims and exposure from a particular accident year.

It is my theory that the settlement philosophy that is currently being used by many of claims administrators is a major underlying reason that workers' compensation has a long and expensive tail.

When I was a baby claims examiner, I was taken into the back room, was given the secret examiner handshake and was also told the following:

"If the employee is still working at the insured, and if the insured is still on risk, then stipulate to provide partial disability and lifetime future medical care. If the employee is no longer working at the insured, or if the insured is no longer on risk, then C&R the claim."

I never thought about how medicine would change and develop with increasing costs associated with this development. Nor did I anticipate that people would live longer

When I learned this philosophy, I never really considered the possibility that handling a claim differently when an insured was on risk and no longer on risk could potentially be bad faith claims handling.

It is difficult for most claims professionals to question basic claims-handling tenants that they were taught as a baby claims examiner.

The basic reasoning underlying the settlement philosophy of stipulating was that it would be easier to obtain apportionment if there was a subsequent injury. (In California, this reason diminished with the passage of the workers' comp reform bill, SB 899). There was also a belief that, by stipulating to provide lifetime future medical, it would stop the insurance company (or employer) from paying for the same injury over and over again.

The settlement philosophy did not account for problems associated with the injuries that are what I call the "sisterhood of the traveling body parts," where a relatively minor injury results in multiple surgeries or massive disability for no apparent reason (read my column on these workers' compensation injuries here).

The concerns about paying twice for the same injury and for achieving apportionment had a valid basis but were not necessarily correct. This settlement philosophy did not take into account medical inflation and was developed when people did not live as long.

The Sherman and Diss paper lists increased mortality and a high medical inflation rate as causes of the expensive and long tail.

That research paper, however, does not compare the reserve loss development of states that allow compromise-and-release settlements versus states that require the insurance company to provide lifetime future medical care, which would validate my theory that the ability to compromise and release a claim has an impact on the length of the tail

STILL BABY CLAIMS EXAMINERS

This settlement philosophy that I learned as a baby claims examiner over 30 years ago is still being utilized by almost all of the insurance companies and third-party administrators in the United States. It is particularly true for how self-insured claims are handled, resulting in a higher percentage of stipulated claims for self-insureds than for insured companies and therefore an even larger and longer tail for self-insured and large-deductible companies.

The claims that have no payment activity are usually administratively closed after two years. However, a small but very active number are open cases where the loss costs blow out the back door.

Some states do not allow settlement of future medical care. Their reasoning is that the injured workers are not capable of managing their own affairs. Or they have a concern over cost shifting from the workers' comp system to another system. These can be valid concerns, but they do not take into account the unhealthy relationship for the injured worker who has to remain dependent upon the insurance company.

Most states currently allow a full and final settlement of claims, but injured workers cannot be forced to settle out their future medical rights.

If insurance senior executives (and self-insured administrators) really understood how expensive the workers' compensation tail was, they would probably change their settlement philosophy (and would probably also be willing to pay more to settle the files).

Most senior claims executives have never even thought to question (nor attempted) to change the existing settlement philosophy, because it is fundamental to what they learned as baby claims examiners.

It is the job of the actuary to raise the question of settlement philosophy and to do the analytics to help make sure that the settlement philosophy that is implemented is based on facts rather than on what we all learned as baby claims adjusters

A final note: The advent of Medicare set-asides may also have a significant impact on the settlement philosophy. These are the kind of changes that require increased analytics to support the settlement philosophy.

<i>Bill Zachry is vice president of risk management at Safeway Inc. and a board member of the California Self Insured Security Fund. </i>