Mega Claims in Workers Compensation 2019

Introduction

The workers compensation (WC) line has experienced a long-term decline in overall claim frequency that has spanned several decades. Despite fewer claims in the system, however, very serious accidents continue to occur, with costs for medical treatment and lost-wage benefits sometimes rising into the multimillion-dollar range. The WC industry has paid considerable attention to these large claims in recent years.

In this article, we will examine the frequency of mega claims for all National Council on Compensation Insurance (NCCI) states and Indiana combined over the most recent 16 years available. For purposes of this article, we define a mega claim as a claim for which the reported severity (or average cost of a claim) is $10 million or higher. The severity is the reported, undeveloped average cost per lost-time claim (paid losses and case reserves) for medical and indemnity combined at the specified report.

This article summarizes the mega claim information presented by Barry Lipton at NCCI’s Annual Issues Symposium 2019.

Key Findings

  • A relatively high number of mega claims (10) occurred in NCCI states in 2016
  • NCCI estimates that 10 mega claims also occurred in 2006 as measured in today’s dollars
  • Preliminary data shows a decrease in mega claims so far for 2017 and 2018
  • A relatively high number of mega claims occurred in the years leading up to the Great Recession, but the number dropped considerably during the recession and remained low as the economy began its recovery

Mega Claims

NCCI’s Large Loss and Catastrophe Call1 is the source of data for this analysis. The Call includes information on all claims for which the indemnity and medical paid losses and case reserves equal or exceed $500,000.2, 3, 4 We have elected to exclude large deductible policies since they are only included on the Call for all states beginning with the year-end 2017 valuation.

Chart 1

In AY 2016, the number of mega claims increased to 10. However, preliminary data shows that fewer mega claims have emerged so far in the more recent years. Specifically, from AY 2016 to AY 2017, the number of mega claims dropped from 10 to 6 at 24-months of maturity. Further, preliminary data indicates fewer mega claims observed in AY 2018 compared with AY 2017 at the same 12-month maturity. While this is certainly good news, these relationships may very well change as these years develop and additional claims emerge.

We would expect the number of claims above the fixed threshold of $10M to increase over time due to wage and medical cost inflation. However, the Great Recession caused some volatility in this pattern. The number of mega claims is high in the years leading up to the recession, but it dropped considerably during the recession and remained low as the economy began its moderate recovery.5

Chart 2 overlays our estimates of how many mega claims might have occurred in each year if the 2017 inflation level was in effect during each of the historical years. Specifically, we have adjusted all claims in AYs 2003 through 2016 to the 2017 inflation level.6 The result is a more accurate year-to-year comparison of mega claim counts. After adjusting for inflation, the AY 2006 count of mega claims increases to 10—equaling the 2016 total. This suggests that the unfavorable experience in 2016 may not be an anomaly, nor the start of a trend, but rather the result of random volatility.

Chart 2

Closing Remarks

WC stakeholders have given large claims a great deal of attention in recent years, especially because these claims can take a heavy toll on injured workers and their families. Several factors can influence year-to-year changes in the number of large claims, including random volatility due to the low volume of these claims, their slow development pattern, and economic conditions. Therefore, identifying trends in large losses can be very challenging. NCCI will continue to monitor the emergence of large losses and share its findings.

Notes

1 NCCI Financial Data Call #31.

2 NCCI jurisdictions: Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, and Indiana (an Independent Bureau jurisdiction).

3 For Financial Call Data, first report is 12 months from the start of the AY; second report is 24 months from the start of the AY, and so on.

4 The Call also includes catastrophe (CAT) claims regardless of the size of claim. CAT claims refer to extraordinary loss event claims that have been assigned unique catastrophe numbers.

5 The Great Recession spanned December 2007 through June 2009, according to the National Bureau of Economic Research.

6 The indemnity portion of each claim was adjusted for changes in average weekly wages by state (US Bureau of Labor Statistics: Quarterly Census of Employment and Wages) and the medical portion was adjusted for changes in medical inflation (Personal Health Care Chain-Weighted Price Index).


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