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Workers Compensation and Solvency II

Tracing and auditing are key factors within the Solvency II architecture.

An integrated model, based on the CBFA standard model, offers a clear view on the insurers risk management to executives as well as actuaries and external controllers.

Within the integrated model, input files are linked, manual and actuarial decisions are discussed and then reported.

The main challenge is however to combine several sub-models and systems into a coherent unit. This is more than vital for businesses as complex as the Workers Compensation Insurance, as this insurance involves about every technique described in Solvency II.

Risk modelling within Workers Compensations Insurances needs special care, as the risks not only depend on the claimed damage but also on the settlement over several years.

Nature of the claim

Claims in Workers Compensation can be of a very different nature.

Many accidents only cause temporary disablement and fully heal in time. They will be modelled through a non-life technique, in which the frequency and the severity of the claims determine the weight of the risk.

However, accidents that cause permanent disablement are a lifelong process and require life techniques. Different reserves reflect the life-cycle of permanent disablement claims: At the opening of a claim, a reserve for claims to be settled will be determined. It is only after consolidation of the injury that the insurer will be able to determine a preliminary mathematical reserve (PMR) based upon the allocated degree of permanent disablement. During the revision period the claim can deteriorate or on the contrary evolve positively. After the revision term a final mathematical reserve (FMR) is established in view of the life-long interest settlement. This reserve contains nevertheless a part for possible temporary aggravation.

Modelling

The post-claim situation requires the modelling of three kinds of reserves.

The reserve for claims to be settled will typically be modelled by classical non-life loss triangle techniques. The moment of consolidation and thus setting of the PMR reserve will be seen as a payment. They will result in “new business” for the PMR reserve.

Claims in PMR and FMR require almost pure life techniques. They require adjusted mortality tables and a link to economic scenario generators in view of the indexation rate of the indemnity. Also processes such as temporary or permanent aggravation, widows’ benefits for spouses and children, prostheses, medical charges, the right to surrender need to be taken into account.

The pre-claim situation will generalize the results of the post-claim modelling, and will concentrate on future frequency and severity based on a non-life technique.

The OOliba Approach

OOliba not only offers systematisation and automation of the standard model, but also a full package for complex insurance businesses such as Workers Compensation.

Within the OOliba system sub-models with life and non-life techniques can be integrated into a coherent unit that also takes into account underlying public aspects such as wage and medical inflation. For this, OOliba offers a platform for DIY design with several modules and maximum flexibility.

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