at 2 percent to 3 percent based on historical wage inflation levels.
Medical severity trends historically
have been much higher than general
economic price changes. Over the past 20
years, the medical consumer price index
(CPI) has exceeded the overall CPI of 2
percent to 3 percent by one to two points.
Workers’ compensation lost-time medical claims severity has experienced a 7
percent to 8 percent annual trend over
a similar period. Reviewing the major
components of medical costs for lifetime
cases—hospital, physician, prescription drugs, attendant care, equipment,
etc.—is helpful in selecting a trend rate
for a workers’ compensation pension
model. Since the proportion of these
components is different for older claims
because of lower hospital costs and higher prescription/attendant care costs, the
blended overall trend rate may be different from overall medical CPI or workers’
Selecting an appropriate mortality table to
reflect life contingencies considerations
is another key assumption of a mortality-based model. Many mortality table
options are available, but the applicability
to injured workers should be considered.
The RP-2000 mortality tables, which
were developed separately by gender
from a study of more than 11 million
pensioner life-years from 1990 through
1994, projected to 2000, are used most
commonly in private pension plan valuations. These tables may be applicable to
old workers’ compensation claims since
pensioners are workers, but other mortality tables could be applicable as well.
Most experts today see a continued
long-term trend of mortality improve-
ments. A 60-year-old male has a higher
probability of death in his 60th year, for
example, than a 40-year-old male’s prob-
ability of death in his 60th year. Static
tables don’t include adjustments for
potential improvements in mortality,
but may be adjusted to reflect mortality
improvements using scale adjustments
(e.g., Scale AA) or a margin as an implic-
it adjustment. Mortality improvements
also are reflected in generational tables,
which are a series of static tables with
adjustments for mortality improvements.
an appealing approach
A mortality-based approach may produce more adequate liability estimates
than traditional casualty actuarial methods for old workers’ compensation claims
and is the preferred approach for occupational disease claims, particularly for
entities that self-insure these exposures.
The approach reduces the possibility of
adverse runoff of reserves, which can
create a drag on current earnings, and
provides a better understanding of potential excess loss experience. The approach
is intuitively appealing since it requires
only open claims data and is amenable
to sensitivity testing of key assumptions,
including trend, discount, and mortality.
Despite the numerous challenges—
including significant data requirements,
judgments, and specialized skills—a mortality-based approach provides a more
robust understanding of future liabilities,
which is critical to an accurate financial
representation of the costs associated with
old workers’ compensation claims.
BRIAN JONES, a fellow of the Casualty
Actuarial Society and a member of
the Academy, is an actuary with
pricewaterhouseCoopers in Los Angeles.
VICKI FENDLEY, a fellow of the
Casualty Actuarial Society, an associate
of the Society of Actuaries, and a
member of the Academy, is an actuary
with pricewaterhouseCoopers in Atlanta.
CRAIG SCUKAS, a fellow of the
Casualty Actuarial Society and a member
of the Academy, is an actuary with
pricewaterhouseCoopers in Seattle.
KATHRYN FRERMAN is an actuarial
analyst with pricewaterhouseCoopers in
note: For additional details on applying
a mortality-based model to old workers’
compensation and occupational disease
claims, go to http://tinyurl.com/6tk8kwd.