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Forecasting Claims in an Era of Tort Reform
Forecasting mass tort claims is often based on sophisticated models applied to large, complicated databases. These models can account for such causal factors as the size of the exposed population, the dose-response rates between defendant's product and disease, and actuarial mortality rates of the exposed population. Too often, though, there is one variable that is simply extrapolated into the future at historical levels with no attempt to understand its causal influences ' the filing rate (also called the propensity to sue).
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.
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