NCCI Studies Excess Loss Development

Largest Claims Develop Down and Smaller Ones Develop Up Over Time

By John M. Stahl, Esq.

A September 2011 NCCI research brief entitled “Workers’ Compensation Excess Loss Development” followed up on NCCI’s 2007 study of the same name.

The executive summary of the current study explained that “large loss and excess development is relevant to calculating excess loss factors used in retrospective rating.” In simpler terms, this means that these calculations help determine the possibility and amount of excess losses.

This summary added that the current study examined loss development related to:

“∙ Large deductible policies

∙ State lump-sum settlement rules [and]

∙ State ELFs (excess loss factors) at a $1 million limit.”

NCCI reported as well that it based its conclusions regarding excess loss development patterns on “large loss and catastrophe claims” that involve a claim of at least $500,000 and that relate to Accident Year 1984 forward.

What is excess loss?

It is helpful initially to understand the meaning of “excess loss.” This refers simply to the portion of a workers’ compensation claim that exceeds a “threshold” amount that a self-insured employer or a workers’ compensation insurance company assigned to that claim.

A threshold amount can be a relatively arbitrary value or can be based on the amount that it is believed, based on comparable past claims, at the time of a compensable injury that a workers’ compensation claim will cost. Additionally, the excess amount can be absorbed by the original insurer or by a third party if the insurer purchases reinsurance or other coverage that is designed to cover “excess amounts.”

Excess Development Patterns

NCCI determined that it was likely that workers’ compensation claims that exceeded $5 million would develop down rather than up during a 26-year development period. This research also found that, conversely, claims that were roughly in the $1 million to $2 million range were more likely to develop up than down during a 26-year development period.

Developing down and developing up relate to the trend of the costs of a claim increasing or decreasing during the period in which a workers’ compensation claimant receives benefits.

The study stated as well that “for both incurred losses and number of cases, there are fewer situations where development factors decrease as attachment points increase in this update than in the prior study.” NCCI attributed this to the current research including the period from the 22nd to the 26th years of the development period. In other words, tacking four years to the end of the period under review significantly affected the results.

NCCI observed that the proportion of claims that develop upward decreases as the size of the loss associated with a claim increases. This is consistent with the observation that the costs associated with more costly claims tend to decrease in the later years of such claims.

NCCI added that the size of a loss increasing also results in more frequent “dramatic drops” in estimated claim values (i.e., speculation regarding the cost of the benefits that a workers’ compensation claimant will receive.) Separate cited examples of reasons for this trend included a disabled worker’s death and agreeing to a lump-sum settlement.

Large v. Small Deductible Plans

NCCI determined that workers’ compensation claims under policies with large deductibles had significantly more development in the excess layers, which refer to the higher tiers of benefit payouts, than claims related to policies with ground up or small deductibles.

NCCI reported that it based its findings regarding large-deductible claims on data from Florida, Nebraska, and Virginia because those were the states that provided useful information regarding claims under large-deductible policies.

Medical Lump-sum Settlements

NCCI’s research brief, which generally had a nationwide scope, observed additionally that states that allowed medical lump-sum settlements had more development for high excess layers than states that prohibited that type of settlement.

NCCI concluded further regarding individual states that “no clear and credible differences in development were observed between the states relative to their ELFs at a $1 million limit.”

Disclaimers

NCCI advised that “losses to date can be volatile for excess layers, and applying ... any excess development factors to actual losses may not be very predictive” regarding trends.

NCCI stated additionally that the study limited its scope to the 26th development year and that a 1995 NCCI report entitled “Workers Compensation Excess Reinsurance – The Longest Tail” indicated that “there can be significant development in the higher layers at late stages of development.”  NCCI speculated that reasons for that trend for high layers include “the dispersion of longevity of individual claimants.”

NCCI noted that claims are reserved at expected values during their early stages and that claims with great longevity will begin penetrating high layers at very late stages, which is “beyond the point when the big drops from early mortality and other causes are likely to have mostly ceased.”

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