THE 'WORKMEN'S COMPENSATION INJURY TABLE' AND …
110
WORKMEN'S COMPENSATION INJURY TABLE
THE "WORKMEN'S COMPENSATION INJURY TABLE" AND "STANDARD WAGE DISTRIBUTION TABLE"-THEIR DEVELOPMENT AND USE IN
WORKMEN'S COMPENSATION INSURANCE RATEMAKING*
BY
BARNEY FRATELLO
INTRODUCTION
Workmen's Compensation Insurance Ratemaking is, in its broad aspects, similar to ratemaking in the other fields of casualty insurance. It is known, for example, that the various casualty lines are engaged in a common search for rates that are "adequate" but "not excessive" or "discriminatory"; that in order to attain this common objective, it generally involves the accumulation and analysis of a large volume of loss experience which is adjusted to reflect current conditions through the application of experience modification factors. The manner in which adjustment factors are determined, however, usually proceeds along specialized lines that are singularly appropriate to a particular line of insurance. In Workmen's Compensation Insurance, for instance, the so-called "Law Amendment Factor" is unique in the manner of determination but, as with other experience factors, it is essentially designed to adjust loss experience to reflect current conditions. In this respect "current conditions" signifies the latest revision of benefit provisions contained in the Workmen's Compensation Insurance Act of a particular state.
Underlying the workmen's compensation loss experience of a given state is the Workmen's Compensation Insurance Act of that particular state. When the "Act" is amended by the state legislature in a manner that affects the future payment of compensation benefits, it is obviously important to determine a "Law Amendment Factor" which serves to express the loss experience, under examination for the purpose of revising rates, in terms of the revised benefit provisions. If this revision is of such a nature that "accident distributions" are essential to its determination, this factor may be calculated for the most part in two ways.
The first method involves the revaluation of a representative sample of the compensable accidents underlying the loss experience under consideration in terms of the revised benefit provisions and comparing the resulting cost to the actual cost. Although this may appear to be a commendable procedure, experience reveals that it is wholly impracticable for routine procedure. Besides, the notion of "representative sample" hinges on the immediate availability of an
*This paper presented by invitation.
WORKMEN'S COMPENSATION INJURY TABLE
Iii
adequate volume of cases and on the assumption that complete details regarding every compensable accident is made available to the rating organization which, in fact, is not the case. The other method, adopted by the National Association of Insurance Commissioners, provides for the valuation of benefit provisions based on a single distribution of countrywide compensable accidents, which once established, serves as a relatively permanent base. This latter method furnishes an equally satisfactory but much simpler device for determining the benefit effect of certain types of law amendments.
It is recognized that recourse to an "accident distribution" table is not always essential for determining benefit differentials. As a matter of fact, a review of workmen's compensation legislation which became effective during 1951 and 1953, the heaviest legislative years prior to this writing, reveals that it was necessary in less than fifty percent of the valuations to resort to the "accident distribution" tables. For the most part, the remainder of the valuations was based on a table of "Standard Wage Distributions."
When revision of the compensation act involves a revised weekly benefit scale, it is at times sufficient to merely resort to a table of "wage distributions," disregarding "accident distributions," in order to determine the benefit differential. Since the various state "Acts" provide for payment of compensation benefits at a percentage of the injured employee's average wage, but subject to certain specified minimum and maximum weekly amounts, it follows that wages have a limited effect on loss experience.
Consider the employee whose weekly benefit award, at the specified rate of compensation provided in the "Act," amounts to less than the statutory minimum weekly benefit. Application of the minimum condition will result, in effect, in the payment of benefits based on a higher wage than is actually earned by the injured employee. Conversely, the employee whose weekly benefit award is subjected to the maximum limitation will receive, in effect, an award based on a lower wage scale. Although more will be said on this particular subject in Parts II and III of this paper, it may be stated at this point that with a change in the statutory benefit scale of the Compensation Act there is involved a corresponding change in effective benefit wages. In order to measure the effect of the change, it is essential to resort to some standard wage distribution (unless the compensable cases underlying the loss experience are to be revalued which, for the reasons previously mentioned, is not feasible).
Thus the determination of the "Law Amendment Factor" may require the employment of an accident and/or wage distribution table, depending on the nature of the law amendment. The development of Workmen's Compensation accident and wage distributions will constitute the subject matter of this paper. Part I will treat with accident distributions, Part II with wage distributions and Part III will illustrate the combined use of these distributions in valuing the effect of a hypothetical law amendment.
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WORKMEN'S COMPENSATION INJURY TABLE
PART I - DEVELOPMENT OF THE
"W0RKMEN'S COMPENSATION INJURY TABLE."
A. Historical and Statistical Background: This paper would be incomplete, we believe, if we neglected to comment on the "American Accident Table" published in Volume VII, P.C.A.S. 1920-21" and the "Standard Wage Distribution Table," described in Volume IX, P.C.A.S. 1922-23.T The development of these tables precede the newly created "Workmen's Compensation Injury Table" and "Standard Wage Distribution Table" by approximately thirty years. During the course of this period, there have been many instances where the calculated effect of a law amendment based on these earlier tables had been rechecked by actual revaluation of accidents and the two results were found to be in rather close agreement. Preliminary tests indicate that the new "Workmen's Compensation Injury Table" and "Standard Wage Distribution Table" will produce results that are similar to their older counterpart.
However, subsequent tests indicate an appreciable difference in the results produced by the old and new tables where the amendment provides for increased benefits for the so-called "healing period," that is, benefits for temporary total disability in addition to benefits for permanent partial disability. In this connection it is to be noted that the limitations of the old table with respect to a valuation of a change in the healing period is clearly set forth in the following quotation from Page 61, Volume VII, Proceedings of Casualty Actuarial Society:
"Very little material was available for a distribution of temporary total disability in permanent partial cases, only two states, California and Oregon, having presented such statistics and these for only one year each. However, the results followed very closely those obtained by Dr. Rubinow in the Standard Accident Table and it was felt that the data when smoothed was sufficiently reliable for the present purpose. The comparison with Dr. Rubinow's results obtained by the use of Russian statistics which is presented on the preceding page is interesting."
The new table incorporates, for the first time, accurate statistics, based on American data, with respect to the healing period. The new data are found to have considerably more effect on compensation costs than that derived from the sketchy data available when the old American Accident Table was compiled.
Considering the limited amount of workmen's compensation statistics available thirty years ago and the many changes in compensation benefit provisions, working and social conditions since that time, it is a tribute to the capabilities of the original authors that
*See "An Amer. Acc. Table" by Olive E. Outwater. tSee "Legal Limits of Weekly Compensation in Their Bearing on Ratemaking for Workmen's CompensationInsurance" by A. H. Mowbray.
WORKMEN'B COMPENSATION INJURY TABLE
113
their tables have produced consistently satisfactory results. The "older" tables are not being replaced for functionary reasons but
simply because of a desire to base law valuations on relatively more
recent statistical data. In 1950, the National Council on Compensation Insurance decided
to undertake a statistical study aimed at reviewing, and, if necessary, to revise the "American Accident Table." At the December 1950 session of the National Association of Insurance Commissioners, the Chairman of the Workmen's Compensation Committee appointed a Subcommittee of Departmental Technicians "to study the valuation of law amendments separately and in conjunction with the National
Council staff." During the spring of 1951, the National Council's Committee, after meetings with the Subcommittee of Departmental
Technicians, ~irculated a special "Call for Accident Statistics" (reproduced as Appendix "A") among the insurance carriers. This "Call" visualized the accumulation of 10,000 Major Permanent Partial cases; 25,000 Minor Permanent Partial cases; and 40,000 Temporary Total injury cases. Supplementing the "Call" directed at the insurance carriers, another special "Call" (reproduced as Appendix "B") directed at the Independent Rating Organizations was expected to produce 25,000 additional Fatal and Permanent Total injury cases. These data were to be taken from Individual Case Reports filed by the carriers with the National Council or with the Independent Bureaus.
The response to both "Calls," although gratifying when considering the expense in man-hours, varied with some organizations reporting
data almost immediately and a few reporting as long as one year after circulating the "Call." However, the time element was not significantly important inasmuch as it required more than a year to audit each reported case for inconsistencies with the instructions
appended to the "Call" and to search out obvious conflicts with the jurisdictional Workmen's Compensation Act. In this respect, a voluminous amount of correspondence was carried on between the National Council and the participating organizations.
While the next phase of the study involving the transfer of data to punch cards was, in itself, an enormous task, designing suitable punch cards which would assure the necessary tabulations presented the major problem. Since the analysts engaged in the study could not anticipate the quantity or the nature of tabulations that would ultimately enter into the study, it was decided to punch as much of the descriptive and statistical data as reasonably possible. As a result,
cards were set up for Fatal, Permanent Total, Major and Minor Permanent Partial and Temporary Total injuries that would produce the tabulations outlined in Exhibits A-I through A-IV. Before proceeding with the transfer of the bulk of the data to punch cards, however, a series of preliminary tabulations based on the reportings of a large carrier revealed that the cards as designed- except for a
few minor changes--would produce a wide variety of tabulations. It is estimated that data on approximately 100,000 compensable cases,
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WORKMEN'S COMPENSATION INJURY TABLE
after being carefully audited and coded, were transferred to punch cards prior to tabulation.
B. Fatal Tabulations: The total number of reports included in the study of Death cases numbered 24,282, of which, there were 10,762 National Council and 13,520 Independent Rating Organization Case Reports. Preliminary tabulations established the following relationships :
Type of Dependency
Percent of Total Cases Council Independents Combined
No Dependents Completely Dependent Partially Dependent Dependency Undetermined
9.9% 83.0
2.4 4.7
12.7% 75.8
0.4 11.1
11.4% 79.0
1.4 8.2
Total
'100.0%'
100.0%
100.0%
Compensation benefits to "Partial Dependents" are usually contingent upon a variable degree of dependency. In this respect, the information contained in the small number of individual case reports involving "Partial Dependents" was, for the most part, incomplete and entirely inadequate for the purpose of determining a reliable average. Besides, the typical Workmen's Compensation Act allows benefits to "Partial Dependents" only if maximum benefits provided in the "Act" have not been exhausted by "Completely Dependent" cases and the inclusion or exclusion of these few cases from the distribution would produce a very negligible- if a n y - effect on the ultimate cost of insurance. As a result, it was decided to include the cases in this category with the "No Dependent" cases.
With regard to the group marked "Dependency Undetermined" (cases for which a reserve had been set up but for which a dependency status "may" or "may not" materialize), it was decided to exclude these cases from the study which, in effect, is equivalent to redistributing them proportionately over the original distribution. On the basis of the forementioned observations and conclusions, the final Death tabulations indicated that "No Dependent" cases constitute 13.9% and "Dependent" cases 86.1% of the Fatal distribution. Exhibit B-I shows the actual distribution of 24,282 Death cases before adjustment.
Having established the accident frequency according to the nature of dependency, the next phase of the study involved the determination of average ages representing the various dependency classes. In this respect it was decided to calculate the "arithmetic average age" and, in addition, a so-called "pension age" from punch card data which contained complete age information for the designated dependency classes. For Fatal computations involving a Workmen's Compensation act wherein the benefit provisions are limited to a specified duration
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