Marsh P. Ryan BWC Administrator

Transitioning to a New Claims Reserving System

Accuracy Clarity Transparency

Ohio Bureau of Workers’ CompensationSeptember 19, 2007

Transitioning to a New Claims Reserving System

Accuracy Clarity Transparency

Ohio Bureau of Workers’ CompensationSeptember 19, 2007

Marsh P. RyanBWC Administrator

Marsh P. RyanBWC Administrator

John Pedrick, FCAS, MAAA

BWC Chief Actuarial OfficerJohn Pedrick, FCAS, MAAA

BWC Chief Actuarial Officer

Claim Reserve:

estimated value of

future financial liability for a claim

at a specific point in time

Principles of Insurance Rate Making

Principle #4:

A rate is reasonable and not excessive,

inadequate, or unfairly discriminatory if it is

an actuarially sound estimate of the

expected value of all future costs

associated with an individual risk transfer.

Statement of Principles Regarding Property and Casualty Insurance Rate Making: Casualty Actuarial Society

Accurate Claim Reserves

• More accurate estimation of future value

• More equitable distribution of cost to employers

• Critical to accurate premium rates

• Brings stability to premium rates

• Improves claim management by recognizing severity of claims early

Accurate Claim Reserves also…

• Improved Subrogation Collections

• Faster Claims Settlement

• Retrospective Rating Program-Close Out Reserves

• Identify Fraud Savings

BWC’s Reserving Systems

Tabular Reserves, until to 2002– Average cost of a claim in fitted category– Based primarily on last compensation paid

MIRA I, 2002 to 2007– Automated reserving system that uses

advanced statistical analysis to predict future cost/liability of a claim

Confidential. The material in this presentation is the property of Fair Isaac Corporation, is provided for the recipient only, and shall not be used, reproduced, or disclosed without Fair Isaac Corporation's express consent. © 2007 Fair Isaac Corporation.

MIRA II Overview

Anu Pathria, PhDVice President

Insurance Analytics

Kevin LisleProduct Manager

Insurance Analytics

Kathy BodenClient Relationship

Manager

10© 2007 Fair Isaac Corporation. Confidential.

You touch Fair Isaac technology when you…

Buy or refinance a home Make online purchases Take out auto insurance

Buy or use a cell phone Submit a medical claimUse a credit/debit cardUse an ATM

File for workers’ comp


Industry Focus: Workers’ Compensation

CLIENTS

KEY SOLUTIONS

Reserving Loss Reserving System establishes accurate case reserves

Medical Bill Review Software/Outsource Service

Maximize savings through automated review and repricing

Underwriting Optimize decisions with rules and analytics

Fraud and Abuse Reduce losses from workers’ comp fraud and abuse

Managed Care Services On staff nurses and specialists provide Telephonic Case Management, Utilization Review and Peer Review services

FACT Fair Isaac has provided workers’ compensation solutions for over 16 years, saving our collective clients more than $3.3 billion dollars a year in unnecessary charges.

CASE STUDY

The Workers’ Compensation Fund of Utah has realized millions of dollars in savings using VeriComp Fraud Manager--$4 million in savings the first year alone. Identification of one single fraudulent claim resulted in over $800,000 in savings.


The Business Problems Addressed by MIRA I &2

Solvency

Policyhold

er Satisfactio

n

Actuarial benchmar

king internal

vs. external actuary

Aggregate Bulk

Reserve Investmen

t Allocation

Accurate Ex Mods

and Premium Calculatio

ns

Accurate Reserves

on Individual

Claims

Policyhold

er Satisfactio

n

Accurate Reserves

on Individual

Claims


Which Claim Will Cost More?

Claimant A

25 yr old - knee injury

Construction

Litigated

No Surgery

Claimant B

55 yr old - knee injury

Clerical

Not Litigated

Surgery


MIRA I versus MIRA II

MIRA I

Models tied directly to static claim characteristics

Linear regression models used

Only summary paid data used as cost drivers

Aggregately Accurate

MIRA II

Next generation modeling techniques

Enhanced use of payment transactions over time

Multiple sub-models

Continued Aggregate Accuracy

Strong Individual Claim Accuracy

Longer shelf-life

ModelingTechnology

Accuracy


Claim-level Accuracy –MIRA II is better than MIRA I

$100

$1,000

$10,000

$100,000

$1,000,000

MIRA I Prediction$100 $1,000 $10,000 $100,000 $1,000,000

Fin

al T

otal

Pai

d

$100

$1,000

$10,000

$100,000

$1,000,000

MIRA II Prediction$100 $1,000 $10,000 $100,000 $1,000,000

Fin

al T

otal

Pai

d

25% Split Sample Prediction Scatter Plots Prediction vs. Final Total Paid at 180 Days


Per Claim Accuracy – MIRA I vs. MIRA II

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

90 180 270 365 540 730 910 1090 1270

Days From Claim Report

Do

lla

rs (

$) Ultimate Cost

MIRA I

MIRA II

Paid To Date

Ultimate Cost = $93,553



$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

90 180 270 365 540 730 910 1090 1270


Do

lla

rs (

$) Ultimate Cost

MIRA I

MIRA II

Paid To Date




$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

90 180 270 365 540 730 910 1090 1270


Do

llars

($) Ultimate Cost

MIRA I

MIRA II

Paid To Date



MIRA II Aggregate Accuracy

Days OpenNumber of

ClaimsAverage

Paid

MIRA II AverageIncurred

Adjuster AverageIncurred

MIRA II% Ultimate

Adjuster% Ultimate

60 46,085 $19,360 $18,773 $10,190 96.96 % 52.64%

90 43,142 $20,548 $19,929 $11,829 96.99% 57.57%

180 35,540 $24,150 $23,671 $16,192 98.02% 67.05%

365 25,070 $30,721 $30,387 $23,901 98.91% 77.80%

540 18,244 $36,608 $36,386 $30,587 99.39% 83.55%

730 12,932 $42,661 $42,460 $37,362 99.53% 87.58%



Days OpenNumber of

ClaimsAverage

Paid



MIRA II% Ultimate

Adjuster% Ultimate

60 46,085 $19,360 $18,773 $10,190 96.96 % 52.64%

90 43,142 $20,548 $19,929 $11,829 96.99% 57.57%

180 35,540 $24,150 $23,671 $16,192 98.02% 67.05%

365 25,070 $30,721 $30,387 $23,901 98.91% 77.80%

540 18,244 $36,608 $36,386 $30,587 99.39% 83.55%

730 12,932 $42,661 $42,460 $37,362 99.53% 87.58%



Days OpenNumber of

ClaimsAverage

Paid



MIRA II% Ultimate

Adjuster% Ultimate

60 46,085 $19,360 $18,773 $10,190 96.96 % 52.64%

90 43,142 $20,548 $19,929 $11,829 96.99% 57.57%

180 35,540 $24,150 $23,671 $16,192 98.02% 67.05%

365 25,070 $30,721 $30,387 $23,901 98.91% 77.80%

540 18,244 $36,608 $36,386 $30,587 99.39% 83.55%

730 12,932 $42,661 $42,460 $37,362 99.53% 87.58%


How MIRA II is Built

DerivePowerfulVariables

Variable 1

Variable 2

Variable n

Predictive

ModelDataPredictionPrediction

Support Support Decision Decision MakingMaking

Extracted Extracted from BWC’s from BWC’s

systemsystem

FIC cleans and screens raw data to derive

predictive characteristics

Combine derived variables to provide an overall

projection of ultimate final claim cost


Model Variables –MIRA II’s use of dynamic variables enhances claim-level accuracy

Static Variables Date of Injury Average Weekly Wage ICD-9 Code Date of Birth Claimant Zip Code

Dynamic variables, based on financial transactions, become more important

over time

Dynamic Variables Medical Paid TTD (TTD/TPD) Paid PPD Paid Hospital Paid Chiropractor Paid

Variable Contribution

0

20

40

60

80

100

0 3 6 9 12 15 18

Months from Claim Report

Perc

enta

ge

Contr

ibuti

on

DynamicStatic


Predictive Models take a holistic view when making forecasts Factors the combined interactions of claim

characteristics

Model prediction reflects the historical cost of similar claims as handled by BWC in the past

When a Claim is Processed by MIRA II:• Injury Severity Determined• Appropriate benefit-level models provide

predictions based upon Injury Severity• Model Controls stop predictions

Body Part

$ Prediction

Nature

AWWRx Paid

Severity

PPD Paid


Type 1 Death

e

Type 9

PPD

MIRA II Severity

Classification

MIRA IISub

Models

MIRA II Controls

(Stop Logic)

TTD Reserve/TPD / Wage Loss

PPD ReserveLiving Maintenance

Medical

Medical

PPD Category

No PPD Paid for 390 Days

TD Indemnity

No TD Paid for

390 Days

CLAIM

How MIRA II Assess Perm Partial Claims

Medical

No Medical Paid for

390 Days


Models are the Best Approach to Reserving

Proven, sound, modeling methodology Non-judgmental Based on Millions of Ohio claims Consistent Accurate

Understandable predictions Based on file facts that are displayed on reports Reason-codes explain why a prediction has changed


MIRA II Provides Data Empowering BWC Reserve Transparency

Individual Claim Data Summarize the relevant file facts

- Making it easy for BWC to understand the connection between data and reserves

- Aides in data clean up

Gives reasons for changed predictions

Aggregate Claim Data BWC can drill down into MIRA II reserves on groups of claims Data can be exported to Excel, Reporting Database


Claim Identification Section

Unique information regarding the claim, the claimant, and the employer

Claim Number : 13947690 Branch : 00

Claimant : MANT, CLAY Examiner : F13KLJ3P

Jurisdiction : IL Claim Unit :

Employer : THE SUN-TIMES COM Date of Injury : 01-17-2001

Policy Number : 4005233330008 MIRA Status : Open

Policy Eff.Date : 01-01-2001 Prediction Status : First Time

=========================================================================================

CLAIM IDENTIFICATION


Claim Characteristics Section

Summarizes Data used by MIRA II

CLAIM CHARACTERISTICS

MIRA II Injury Type : 9 Permanent Partial Duration Start Date : 01-23-2001

ABC Injury Type : 9 Permanent Partial Claimant Birth Date : 07-23-1946

Accident Cause Code :05 Fall (From Elevation) Tenure Days : 1798

Body Part Code : 34 Wrist Report Delay Days : 6

Nature of Injury : 28 Fracture Claimant Gender Cd : M

Job Class Schedule : 32 Cartage and Trucking Medical Rehab Code : Y

Marital Status Code : M Married Average Weekly Wage: 917.15

Employment Status : F Full-time employee Claimant Zip Code : 60187

Death Hosp Claimant Life Inj On

Ind Flag Attorney Pension Premises

======= ======= ======== ======= ========

N N N N N ===========================================================================================


Claim Summary Section

Shows Paid amounts, MIRA II Predictions and Actual Claim Duration

CLAIM SUMMARY

======================================================================================

MIRA II MIRA II Paid Reserve Incurred Medical : $993 $8,925 $9,918 Indemnity : $5,672 $8,307 $13,979 Medical Rehab : $0 $861 $861 Indemnity Rehab : $0 $0 $0 Legal Expense : $0 $0 $0 ========== ========== ========== Claim Total : $6,665 $18,093 $24,758 Actual Duration: 230 Days


Prediction Change Reasons

Shows the Prediction Change Reason Codes and descriptions and the Prior Paid and MIRA II Incurred amounts for claims with updated predictions.CLAIM SUMMARY

======================================================================================

New Changed Characteristics 54 – PPD Payments 00 – Medical Payments 45 – TTD Payments Density 78 – Indemnity Payments MIRA MIRA Paid Reserve Incurred Medical : $4,912 $8,348 $13,261 Indemnity : $7,310 $37,048 $44,358 Medical Rehab : $0 $0 $0 Indemnity Rehab : $0 $0 $0 Legal Expense : $0 $1,035 $1,035 ========== ========== ========== Claim Total : $12,222 $46,431 $58,654 Actual Duration: 220 Days


Inaccurate Claim Coding will impact Reserves

CLAIM CHARACTERISTICS

MIRA Injury Type : 9 Permanent Partial Duration Start Date : 11-02-2000

AMC Injury Type : 5 Temporary Disability Claimant Birth Dt : 03-24-1951

Accident Cause Code : 6 Struck Against Tenure Days : 1497

Body Part Code : 90 Multiple Injuries Report Delay Days : 4

Nature of Injury : 10 Contusion Claimant Gender Cd : F

Job Class Schedule : 9 Services Medical Rehab Code : N

Marital Status Code : S Single Average Weekly Wage : 491.00

Employment Status : F Full-time employee Claimant Zip Code : 40258

Death Hosp Claimant Life Inj On

Ind Flag Attorney Pension Premises

====== ====== ======== ======== ========

N N N N N =========================================================================================


Reserves Before Data Clean Up

=========================================================================================

=========================================================================================

Before

MIRA MIRA Paid Reserve Incurred Medical : $0 $7,018 $7,018 Indemnity : $8,401 $7,367 $15,768 Medical Rehab : $0 $0 $0 Indemnity Rehab : $0 $0 $0 Legal Expense : $0 $0 $0 ========== ========== ========== Claim Total : $8,401 $14,305 $22,786 Actual Duration: 351 Days



Reserves Are More Accurate After Data Clean Up

=========================================================================================

=========================================================================================Before


After – Data Changed to Wrist Sprain

BWC will be upgrading

to a technologically

superior version from

Fair Isaac

“…shall completely transition from use of the Micro Insurance Reserve Analysis System to a different system or different version of that system to determine the reserves for use in establishing premium rates…”

Meeting the Requirements of House Bill 100

Employers can view all

data used in the

reserves online, BWC to

provide training

“The Administrator

shall transition to a

reserve analysis system

that is characterized as

transparent in nature…”


“The manner in which

the system uses data

can be understood in

general terms by

employers…”

New system uses standard

data elements and

payment patterns to set

reserve

Data that impacts reserve

to be made available online


“The type of data the

system uses in making

reserve analysis can

be explained to

employers…”

When a reserve

changes the data

element caused the

reserve change

(will be identified to

the employer)


“The Administrator shall communicate information describing the manner in which the new reserve analysis system uses data and the type of data the system uses in making reserve analysis to employers…”

All data elements will be viewable by employers on BWC website for each claim

Training will be provided by BWC to employers to explain data used for reserves


BWC’s New Claims Reserving SystemAccuracy

New reserving system will:

• Use new historical claim data

• Use regularly updated claim data

• Reflect improved claim management environment

• Reflect improved statistical analysis

• Be responsive to Ohio specific requirements

BWC’s New Claims Reserving SystemClarity

BWC will provide customers with:

• Information and instruction on reserve methodology

– Start/Stop Reserving Logic

– Payment Pattern Impact

– Statistical Data on Average Claim Reserve

– General Reserving Rules

• BWC Sponsored Training

BWC’s New Claims Reserving SystemTransparency

BWC will provide customers with:

• Improved online web services

– Listing of Claim Data used in reserve prediction

– Reason for change in reserve

– Average claim cost/reserve by injury type

– Reserving methodology resource manual

• More frequent reserve updates

BWC’s New Claims Reserving SystemNext Steps

• Continue Development of Reserving Model• Develop Applications to Improve Transparency

– Creating Online Services

– Policy Information Request System (PIRS)

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Marsh P. Ryan BWC Administrator

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