Term Of The Day – Loss Development Factor
The Loss Development Factor is also known as LDF is an element used to adjust losses to reflect the Incurred But Not Reported losses (IBNR) under the retrospective method of rating.
Where I have seen LDFs used the most are for Workers Comp Self Insureds. The LDF is somewhat analogous to the Experience Modification Factors (E-Mod or X-Mods). LDFs are usually calculated using the actuarial Triangulation Method. I have calculated LDFs for self-insureds for up to 10 years in the future.
During self-insured presentations, a great concern comes over me when I ask for a show of hands as to which self-insured organization knows their LDF. Many say they do not have one calculated for their company or organization. This is a BIG MISTAKE. Your company is operating your Self-insured Risk Management and safety without a map or GPS.
I give presentations on LDFs and E-Mods (X-Mods) often. LDFs stretch over a five to 10-year span of time. They have similarities to Mods. They also differ from Mods greatly. The inputs to a Loss Development Factor should be considered as part opinion and part calculated numbers.
We have two current customers that use software to calculate their own LDFs. They sometimes call me to ask my opinion on the inputs to the formula and which test would be the best for their situations. A manufacturer’s LDF likely varies from, for example, a school system.
If you are self-insured and do not have an LDF, it is best to have one for future forecasting of the IBNR and existing claims. There are software packages that will calculate the LDFs, but the info to be input may need to be adjusted to your specific Workers Comp situation. One size does not fit all with Loss Development Factors.
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