NOTE 12 — WORKERS’ COMPENSATION
We pay for workers’ compensation costs under a program administered by the DOL. These costs, recorded as an operating expense, include employees’ medical expenses, compensation for wage loss and DOL administrative fees. The program also provides for payment of benefits to dependents of employees who die from work-related injuries or diseases.
Our liability at September 30, 2009, represents the estimated present value of the total amount we expect to pay in the future for postal workers injured through the end of 2009. The estimated total cost of a claim is based upon the date of injury, pattern of historical payments, frequency and severity of the injuries and the expected trend in future costs. We update discount and inflation rates assumptions quarterly, starting in Quarter III, 2009.
We estimated our total liability for future workers’ compensation payments to be $10,133 million at the end of 2009 and $7,968 million at the end of 2008. The payout period for this liability will, for some claimants currently on the rolls, be for the rest of their lives.
Our liability estimate of $10,133 million at September 30, 2009, reflects an increase of $1,051 million compared to 2008 due solely to a change in the timing of the annual payment to Department of Labor for claims paid on our behalf. Beginning in 2009, we are making the payment on the statutorily required deadline of October 15, instead of September 15 as we had done in previous years.
The liability is highly sensitive to changes in inflation and discount rates. An increase of 1% in the discount rate would decrease our estimate of the liability by approximately $818 million. A decrease of 1% would increase our estimate of the liability by approximately $981 million.
We implemented a revised actuarial model to calculate our workers’ compensation liability at September 30, 2008. The revised model explicitly projects the estimated cost to resolve the most recent 10 injury years. We continue to rely on an independent actuarial consulting firm to perform an actuarial valuation on injuries occurring more than 10 years in the past.
Our model estimates the liability for the most recent 10 years using the paid-loss development method, two frequency/severity methods and an expected unpaid method. The paid-loss development method estimates the liability based on the historical pattern of payments observed over many years. The frequency/severity methods estimate the liability by considering not only the cost, but the number of claims payments over many years. The frequency/severity methods require that we make explicit assumptions about the future changes in the average payment amounts due to inflation or other cost increases. The expected unpaid method estimates the liability by giving weight to both the expected development from the paid-loss development method and the estimated ultimate value from the frequency/severity method. For injuries occurring more than 10 years in the past, an estimate of the ultimate liability is prepared by an independent actuary and incorporated into our model. All of the methods used in calculating the 2009 and 2008 workers’ compensation liability are generally accepted actuarial techniques and are valid for estimating a liability such as ours.
We review the inflation and discount rates used to determine the present value of estimated future workers’ compensation payments on a quarterly basis. Separate analyses of the appropriate inflation rates for the medical and compensation portions of the liability are performed, utilizing forecasts of medical inflation and inflation in the general economy, and forecasted rates of return on baskets of Treasury securities of varying durations. The assumptions used to calculate the compensation claims liability in 2009 are a discount rate of 4.9% and wage inflation of 3.2%. For medical claims, we used a 4.4% discount rate and 3.8% for medical inflation. In 2008, we used a discount rate of 5.6% for compensation claims and wage inflation of 3.0%. For medical claims, we used 5.4% for the discount rate and 5.0% for medical inflation.
The results of annual actuarial update and discount and inflation rates on the model are as follows:
The $718 million increase in the estimated workers’ compensation liability is primarily the combined result of changes in the discount and inflation rates in 2009.
In 2008, the independent actuary changed their model calculating our liability related to injuries occurring more than 10 years in the past by increasing the length of the period of our past claim payment experience used as a basis to project future claim payments. This change decreased our liability for 2008 by approximately $154 million.
In 2009, we recorded $2,223 million in workers’ compensation expense, compared to $1,227 million recorded in 2008 and $880 million recorded in 2007. The effects of the changes in assumptions are accounted for as changes in accounting estimate in the period of the related change, as defined by GAAP.
In addition to the cost of workers’ compensation claims, DOL charges us an administrative fee for processing claims. In 2009, the administrative fee, which is included in the expense above, was $55 million, compared to $52 million in 2008, and $49 million in 2007.
