Reserving in a Changing Environment
Reserving for Workers Compensation Liabilities for Self-Insured
Entities During Plant Closures, Downsizing & Layoffs
September 13, 2004
Presented by:
Atul Malhotra, FCAS, MAAA
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Introduction
 Corporations today are undergoing staff reorganizations frequently to
respond to the rapidly changing external environment
 These staff reorganizations can have an adverse impact on the
corporation’s workers compensation (WC) costs
 Reviewed the issues and potential impact of plant closures, downsizing
and layoffs on the WC costs of self-insured entities
 The general methodology described here can also be adapted to
reserving for WC liabilities for insurance companies
 Methods vs. Models – our approach to adapt traditional reserving
methodologies to address the related issues
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Introduction (Cont’d)
 Data from Bureau of Labor Statistics – number of nationwide mass
layoff events were steady from 1996 through 2000, jumped up in
2001 and 2002, have been gradually declining since
 A mass layoff event occurs when at least 50 initial unemployment
claims are filed against an establishment during a consecutive 5week period
M ass Layoff Ev e nts by Ye ar
30,000
20,000
10,000
1996
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1997
1998
1999
2000
2001
2002
2003
2004
3
Impact of Staff Reorganizations
Overall impact dependent upon a number of internal and external factors
including:
Internal Factors
 “Downsizing” announcement tactics
 Employee loyalty
 Union relations
 Level of severance benefits
 Psychology of surviving employees
 Skill level of downsized employees and the opportunity and ability to
learn new skills
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Impact of Staff Reorganizations (cont’d)
External Factors
 Economic environment in the local area
 Local unemployment rates
 Socioeconomic issues that can vary by geographic areas
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Impact of Staff Reorganizations (cont’d)
Based on a combination of the above factors, we observed an increase in
WC costs from anywhere between 0% to 100%
Some of the impacts observed are similar to the impacts observed during
recessionary periods
Most of the impact is limited to most recent two to three accident years
 Claim Frequency may increase
 Claim severity may increases
 Litigation rate may increase
 Change in claim reporting rates
 Change in claim settlement rates
It is impossible to completely delineate the impact of plant closures from
other impacts.
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Claim Frequency
The factors that may cause increased claim filings from laid-off
employees are as follows:

WC benefits can partially substitute for loss of income

The differential between full pay and WC benefits is absent

Difficult to lay off employees with open WC claims

WC benefits usually larger and paid over a longer period of time

Additional surgeries/procedures may be scheduled

Deterioration of relations between management and employees

Lower compliance with appropriate safety behaviors

Lower motivation to comply with appropriate safety behaviors
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Claim Severity
The reason for the increase in claim severity may be the following:
 Shift medical costs for chronic injuries or ailments to WC system
 Absence of rehabilitation and return-to-work programs
 Distribution of surviving employees
 Distribution by type of claim
 Some chronic injuries concealed for a longer period of time may be
revealed at the time of layoff
 Increase in disability duration due to the increased time to find
re-employment
 Attorney involvement – class action suits, employment practices liability
 Moral hazard issues
 More frequent and larger lump sum settlements
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Increase in Costs
Some of the literature we reviewed on the impact of recessions on WC
costs cited the following reasons for the increase in costs:
 Increased average duration of temporary total disability cases
 Increased medical costs due to increased utilization of medical services
 Higher permanent partial disability ratings
 Increased claims for occupational disease or cumulative injury cases
 Other indemnity benefits
 More frequent and larger lump sum settlements
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Diagnosing the Impact
Reported Claim Counts By Accident Year
1,200
1,000
800
600
400
200
12
24
36
48
60
Evaluation Month
11
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13
14
15
10
Diagnosing the Impact
Reported Claim Severity By Accident Year
25,000
20,000
15,000
10,000
5,000
12
24
36
48
60
Evaluation Month
11
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13
14
15
11
Diagnosing the Impact
Ratio of Lost Time Claim Counts to Medical Only
Claim Counts By Accident Year
1.00
0.80
11
0.60
12
13
0.40
14
0.20
15
0.00
12
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36
48
Evaluation Month
60
12
Diagnosing the Impact
Paid ALAE to Paid Loss Ratio By Accident Year
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
12
24
36
48
60
Evaluation Month
11
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13
14
15
13
Diagnosing the Impact
Paid Pure Premium per $ 1 0 0 of Payroll
12.0
Paid Loss & ALAE
Pure Premium Per $ H undred Payroll
10.0
8.0
6.0
4.0
2.0
0.0
1998
1999
2000
2001
2002
Fiscal Accident Year
At 3 months
At 18 months
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At 6 months
At 21 months
At 9 months
At 24 months
At 12 months
At 15 months
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Discussion of Methodology
 The non-systemic nature of staff reorganizations can distort the results of
standard reserving methodologies
 Standard methodologies may over react or under react to the changing
conditions
 Non-standard methodologies such as the Berquist-Sherman and other
similar methods may not be appropriate as the underlying
exposure/propensity to loss changes as a result of these staff
reorganizations
 Claims mix changes
 Employee distribution by type of occupation may change
 Other factors – employee psychology, employee management
relations, etc.
 If sufficient data is available, try to segment the loss development data
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Discussion of Methodology (cont’d)
Frequency /Severity Approach:
 Back to the basics – adopting a claim frequency severity approach to
calculating ultimate loss and reserves
 Calculate ultimate claim severity by type of claim
 Review claims mix by type of claim
 Develop ultimate claim counts using development or Bornhuetter-
Ferguson (B-F) approach
Advantages of the frequency/severity approach in a staff reduction
scenario:
 Avoids the non-systemic distortions caused in the latest diagonals
 Allows for explicit adjustment for changes in exposure and type of loss
 Allows for the calculation of cost impact for WC costs as result of staff
reorganizations
 Estimates of ultimate loss form the frequency/severity method can be
used as initial expected losses for the B-F techniques
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Discussion of Methodology (Cont’d)
Modified Loss Development Pattern for use in the B-F Methodologies:
 Modify historical loss emergence patterns by adjusting for the emergence
of the additional plant closure impact
 Input from the claim adjusting personnel and the company risk manager
essential
 Use the modified loss emergence pattern and initial expected loss from
the adjusted frequency/severity method to develop estimates based on
B-F methods
ALAE Modeling:
 Develop empirical model
 Model accident year paid ALAE to paid loss ratio using data on variables
such as litigation rate of claims and indemnity to med-only claim ratios
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Conclusion
 Actuary should consider the impact of plant closures and layoffs when
calculating WC liabilities for self-insured entities
 Loss estimates produced from the adjusted methods vary based on the
assumptions and adjustments made
 Loss development methods without any adjustments too responsive
 B-F methods without any adjustments slow to respond to the changing
conditions
 The adjustments made to the B-F method make it more responsive
 Using the frequency/severity approach allows the actuary to explore the
changes in the underlying propensity to loss and incorporate the changes
into the reserving methodology
 Most importantly, we should look for the impact and try to understand the
changes and communicate these changes to the management
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