What Would a 20-Year Experience Mod Look Like?
A 20-year Experience Mod at first glance seems like almost a joke. Then, when one looks at a normal distribution of workers comp claims for a two-decade timespan, no one would be laughing that much, if at all. Two concepts make me think that it would work except possibly for the amount of data storage – now most server-based data storage is just not a concern.
- Most LDFs cover a 10-year time span. Think of an LDF as a Mod for self-insureds that spans 10 years.
- Most business cycles of successful businesses cover at least 20 years. See this article on business cycles.
A 20-year Experience Mod would very likely lessen the effect of one bad claims year even more than the present systems’ built-in safety nets.
What made me think about reprising a 2021 article (see preceding link) came from a recent article in the Carrier Chronicles on long-tail claim valuations. I suggest that you read the article in this link-(worth your time).
I borrowed the graph from that article after trying to search for alternate graphs. The more I searched, the more complicated the graphs. The Chronicles’s graph is below. It is a simple explanation of long-tail claims in one graphic.
As one can see, the long-tail values level out over time. Almost all the rating bureaus have covered this topic at one time or another. With Workers ‘ Comp claims severity increasing while the number of claims has fallen over the last 30 years, the green part of the graphic used to be a rare occurrence. Now, long-tail claims are a growing set of data.
Overall, one could think of rating bureau data as the red part of the graphic and the orange part represents the LDF calculations. This article was more of a “get the conversation started” than making any judgments on the current Mod system. This quote from the article sums up why workers comp carriers and rating bureaus have different data sets.
“For example, carriers will have significantly more years of data for estimating outstanding liabilities, whereas bureaus collect data from members for the specific purposes they are authorized or permitted to provide by regulations or their membership.”
A 20-year Experience Mod may currently be out of the question, but where does an insured go for 30+ year claims analyses?