Workers’ Compensation Costs and Heterogeneous Claims

Abstract

The distribution of Workers Compensation claims are known to have thick tails so that even though claims are of relatively short duration a substantial amount of the indemnity losses are accounted for by claims that are very long in their duration. The former types of claims can be reasonably characterized as “high frequency/short duration” claims, whereas the later are “low frequency/long duration” claims. Duration and frequency are, of course, highly correlated with the type of claim. Temporary Total claims arising from lacerations, strains, and sprains are likely to be relatively high frequency events of short duration so that the claim indemnity costs are small per individual claim. In contrast, a permanent partial spinal cord injury is a relatively low frequency, but long duration, type of claim whose costs per claim are inevitably very large.

Prepared for the National Council on Compensation Insurance’s Conference on Worker’ Compensation Issues, Nov. 13, 1987. We wish to thank the National Council on Compensation Insurance for providing the data used in this study, and the College of Family, Home and Social Sciences at Brigham Young University for computer support.