Captive Reserve Question Concerning LDF’s
A good question about Captive reserve from readers. I am responding to a question from Wayne on this post. I will paraphrase the question. How do I calculate the reserves required if I have had a workers comp captive since 2005? This is a very good question.
The easiest way to calculate the reserves required is by calculating a Loss Development Factor. The definition of an LDF is here along with my last article on LDF’s. There are two schools of thought – one that says use the triangulation method and my school of thought that says use the triangulation method and a regression model.
The LDF will analyze the reserves and especially the IBNR (Incurred But Not Reported) part of your required reserves. We often calculate hybrid LDF’s for our clients. LDF’s are usually based on the claims experience you will have for the next 10 years. It is not the most accurate statistic, but it is what you have to work with in reference to Captive Workers Compensation claims.
ONE DANGER on using software to calculate LDF’s is that data cannot just be plugged into the LDF software and then have the numbers produced in a report. The data has to be extrapolated and altered to make all of the claim data fit into the LDF formula. We do LDF’s very often. LDF’s are very often calculated by actuaries.
As with most things involving Workers Compensation, the LDF is not necessarily a 100% accurate projection. It is not the same as an E-Mod, even though some of the conclusions are the same as LDF’s.
Captives can be great risk management tools in cutting Workers Comp costs. Projecting your company’s upcoming claim payouts is beyond critical.
We will soon open up a website called Synthnods where you can calculate an E-Mod or X-Mod to simulate what your risk factor is if you had a regular voluntary workers compensation policy.
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