Loss Development Factor Critical For Self Insurance
Do I need Loss Development Factor? Loss Development Factors (LDF’s) are one of the under-the-radar parts of the Workers Compensation system. This was a question received last week by a reader that found the blog on Google.
LDF’s can be thought of very generally as the Experience Modification Factor (E-Mods) for self insureds. The Ultimate Claims Value (Ultimate Loss) is a very important term that distinguished self insured analysis from a regular WC policy.
E-Mods (also referred to as X-Mods) are limited in scope to a maximum of almost five years in the past in certain situations. LDF’s cover up to 10 years as the risk of being a self insured is your company or organization will be responsible for paying the full value of the claim.
There are many companies, including ours, that can calculate LDFs for you. In fact, you can calculate it yourself if you have the right software. The caveat, as any actuary or claims statistician will tell you is the concern about accurate inputs into the LDF formula.
The old saying about GIGO (garbage in- garbage out) applies here to the hilt. Usually, there may be some type of statistical “smoothing” such as lessening the impact of one or more outliers that can make the LDF become somewhat inaccurate.
The bottom line is – as a self insured- how do you budget for claims presently? If you have a method that works, then you are ahead of the curve. However, LDF’s will usually be the most accurate way to assess your present and future WC needs.
It may be good to obtain one to see if your projections agree with the calculated ultimate claims value. Are you looking for 5+ years into the future? If not, an LDF may assist you with long term budgeting.
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