Forecasting Claims in an Era of Tort Reform

The filing rate is defined as the number of people who actually file a claim divided by the population of potential claimants. To give an example: The population who can file a lung cancer claim against the Manville Personal Injury Trust includes virtually all workers exposed to Manville-supplied asbestos who have a primary lung cancer along with physical evidence of asbestos exposure. The filing rate is the yearly number of lung cancer claims on the Trust divided by the nationwide annual incidence of lung cancer among all those who would satisfy the Trust's criteria for payment. It is well known that not everybody who meets the requirements for payment by the Trust will make a claim. In fact, over the late 1990s only 20% to 30% of potential claimants made a claim. Moreover, the filing rate can vary dramatically, up or down, from year to year. Just extrapolating past filing rates without understanding what causes these up and down movements can lead to serious errors in the overall forecast, even if the rest of the model performs well. In fact, the unanticipated increase in the filing rate of nonmalignant claims is the primary reason for the highly publicized under-forecasting of future asbestos claims that occurred in the 1980s and early 1990s.

The filing rate is a complicated interaction between the behavior of individuals who have suffered an injury and the institutions through which such individuals can seek redress. It is not unlike the interaction between supply and demand and the allocation and prices of resources in traditional markets for goods and services. In claims estimation, however, the challenge is that some, though not all, of the institutions involved in the process of dispensing civil justice have different behavioral responses from those of traditional profit-maximizing firms.