OHIO BUREAU OF WORKERS
COMPENSATION LOSS RESERVES
PROCESS
BACKGROUND
• For many years, an actuarial consultant has provided an annual loss
reserve study with quarterly updates
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Oliver Wyman provided this study through 12/31/09
Deloitte began providing this study in 2010
Study mandated by House Bill 100- required at least every two years
Study is primarily used in determining the financial position of the
OBWC
– BWC did not have an actuarial staff prior to 2007
– Today BWC has an actuarial staff but it is inadequate to do a full
reserve study on its own
– The reserve study is public information
– Currently provided each quarter with an annual update for June 30
Operational Approaches
• Data is entered into data system when payments are authorized to be
made.
– Indemnity payments originate in a claims system when a claims
service specialist authorizes a payment to be made.
• There are no traditional claims adjusters at BWC.
– BWC has a medical payments system which records payments when a
claims service specialist authorizes them.
– Other payments are made on a separate system
• The Financial Reporting Unit validates payments and categorization.
• The Actuarial Division validates the new diagonal every year.
• This data compilation is provided to the consulting actuaries.
• The consulting actuaries perform quality checks
• The auditors perform quality checks.
Reserve Governance Process
• The study is presented to the BWC Actuarial Committee
– The Committee approves the study and recommends the study to the
Board
• The results of the study are used in the audited financial statements
– The independent auditor also has a credentialed actuary review the
reserves.
• The BWC does not file statutory statements but the financial statements
are audited and provided to the state auditor
• The reserves are used in the funding ratio approach of the Board to
solvency.
USE OF A DISCOUNT RATE
• The Bureau prepares loss reserves on a discounted and
undiscounted basis
• A discount rate has been used for at least 30 years
• All reserves are discounted, not merely certain reserves as under
statutory or GAAP accounting
• The same discount rate is applied to all reserves with the rate
changed annually
• The most current discount rate is 4% starting on July 1, 2010
• There is no split in discount rate by accident years as with some
companies
• Complies with Ohio Revised Code that requires Administrator to
maintain rates at the lowest possible level to ensure a solvent state
fund.
AVAILABILITY OF RESERVE STUDIES
• All reserve studies are a matter of public
record and are available to interested parties
through the Bureau
• A large volume set of information supports
the current reserve evaluation
• Each study is well documented in large
binders and on a disk
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Summary of reserve levels in
millions(undiscounted/discounted at
4%) at 6/30/10
State insurance fund: $24,809/$15,718
Disabled workers relief fund: $3,514/$2,044
Coal Workers Fund: $182/$74
Self Insured Employers Guaranty Fund :
$1,929/$889
Public Works Fund: $5/$3
Marine Industry: $4/$2
Admin Cost Fund:$1,794$/1,116
Total: $32,237/$19.847
Notes on Methodology
• Traditionally paid loss has been used exclusively
– Loss reserves were not sufficiently reliable to set loss reserves
for the incurred method
– A new automated case loss reserving methodology was introduced in
2008 that promises availability of incurred losses that will be used as
a secondary method when the reserves are sufficiently mature
• Medical ultimates determined separately from indemnity
ultimates
• Loss adjustment expense developed separately from losses
• Initial estimate for fiscal year ending 6/30/xx derived from
data as of March 31 (new in 2010)
SELECTION OF THE DISCOUNT RATE
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In the end, the selection is made by the administrator with the concurrence of the Board
The selection is made in the 4th fiscal quarter so it can be used in the ratemaking calculation as well
as the reserve calculation in the upcoming year
The investment officer must also concur as to his view on the ability to earn that level of
investment income over a long period of time.
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In recent years, the discount rate has been declining about .5% per year.
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BWC uses a rolling five year average risk free discount rate in setting the discount rate
2003-2004: 5.50%
2005-2006: 5.25%
2007: 5%
2008: 4.5%
2009 and subsequent: 4%
The rate was 7% from 1980 to 1996
In recent years there have only been declines in the discount rate which has served to increase the
discounted reserves.
GASB recommends that an entity’s settlement rate and investment yield rate be used in setting the
discount rate.
Average duration of the liabilities is about 10.32 years
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This closely matches the duration of Treasury bonds with a maturity of 17 years.
ORGANIZATION OF DATA BY ENTITY
INSURED
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State Insurance Fund
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Private employers
Public Employers- Taxing districts
Public employers- state agencies
Self insured
Health Partnership (loss adjustment expense)
– Health partnerships with managed care organizations are unique to Ohio in that almost every
employer is associated with a managed care partnership
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Disabled workers relief fund
– Private employers
– Public employers
– Public employers-state agencies
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Coal workers
Self insuring guaranty fund
Public work relief
Marine industry
Administrative cost fund
ORGANIZATION OF DATA BY TYPE OF
LOSS TYPE
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Medical only
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Indemnity
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Hospital
Physician
Pharmacy
Chiropractor
Rehabilitation
Medical only
All other
Temporary total
Permanent total
Death
Permanent partial
Lump sum settlement
Others
Additional awards
Data available over a long time period
Extensive analysis of expected versus
actual
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Paid claim dollars
Incurred claim dollars
Ultimate loss
Paid claim counts
Reported claim counts
Types of methodologies used
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Paid loss development (primary)
Incurred loss development (new and very secondary)
Incurred B-F
Paid B-F
Paid cumulative frequency severity accident year development
Paid incremental frequency severity accident year development
Paid incremental frequency severity calendar year development
Paid incremental trended frequency severity method
Incremental index payment
Not all methods are used on each segment
Data Used
• Historical state insurance fund payroll
• Historical incremental paid losses by accident year
evaluated quarterly
• Claim reserves from 2 claim reserving systems
• Incremental paid losses for accident years 1977 through
2007 evaluated annually from 1992 to 2007 (change in
system in 1992 limited ability to go back in time in detail)
• Historical incremental paid loss triangles for 1965 through
1995 with some data missing
• A series of prior actuarial reports from 2002 through 2009
• A variety of adjustments were made to the data
MORTALITY STUDY
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Latest study conducted in March 2010- prior study in 2002
Mortality period March 15, 1916 to March 15, 2010
Used for those benefits such as permanent total disability that depend upon the mortality of
the injured workers
PTD has the largest amount of data
Mortality is the number of deaths for a specified age over the exposures for that age
Complicated mathematics used such as Whittaker-Henderson graduation formula for PTD
ages 45 to 95
Six categories used
– PTD-Public- Regular accidents
– PTD-Private- Regular accidents
– PTD-Occupational disease-Lung
– PTD-Occupational disease-Non lung
– Death- Public
– Death- Private
– Current discount rate used
Characteristics of benefits
• Indemnity payments
– Fixed at 2/3 of worker’s weekly wage at time of
injury
– Adjustment made in disabled workers relief fund
– Calculated as a percentage of weeks of benefits
• Medical
– Paid at time of treatment with the expense at that
time
– Influenced by inflation and utilization
– Changes in cost affect all accident years
Issues in the Methodology
• Role of Health Partnership Plan and Managed
Care Organizations in Controlling Costs
• Proper measurement of benefit changes
• Proper measurement of the liberality changes
in the Industrial Commission
• Administrative costs are on a pay as you go
basis
• Increasing use of lump sum settlements in
recent years which distorts patterns in the
other categories of loss