Everyone understands the purpose of proper reserves on workers’ compensation* insurance claims, is to have money available to pay the claim when needed, but as most claim file audits reflect, there is almost always room for improvement on claim file reserving. As a consultant to employers with high workers comp costs, this is a question I have heard numerous times…. is the insurance company over reserving?
It is often debated whether reserving is an art or a science. The workers’ compensation adjuster has to be both an artist and a scientist, both flexible and accurate. To be accurate the adjuster needs to know what the exposure is for wages, permanent disability and medical. To be flexible, the adjuster needs to know when to change the reserves, either up or down.
When the work comp claim is assigned, the adjuster should set the initial reserves within 24 hours of the claim creation. This should included reserves for indemnity, medical and expense. The experienced adjuster should evaluate the nature and extent of injury to set the initial reserves and avoid the use of “formula” reserves where every medical-only claim is assigned the same dollar reserve and every lost-time claim is assigned the same dollar reserve.
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The most accurate way for the work comp adjuster to set the initial reserves, as well as subsequent reserves, is through the use of a reserve worksheet, whether electronic or paper. The reserve worksheet should provide breakdowns of the claim cost into the three primary areas:
1. Indemnity Temporary Partial Disability (TPD)
Temporary Total Disability (TTD)
Permanent Partial Disability (PPD)
Permanent Total Disability (PTD)
Rehabilitation/Vocational Expense
Death Benefits
Dependent’s Benefits
2. Medical Physicians Hospitals Diagnostic Testing
Specialist
Medication
Transportation Expense
Attendant Care
3. Expenses Medical Reports
Experts Peer Reviews and/or IME’s Attorneys Court Cost
Surveillance
Other expenses
During the course of the investigation, the adjuster learns more about the nature and extent of the employee’s injury. Once the initial investigation is completed, the adjuster should evaluate the reserves to see if they are appropriate for the injury, and if necessary adjust the reserve set at the time of case creation.
Unfortunately, some adjusters don’t revisit the reserves when they complete their investigation. They only notice the reserves when the reserves become inadequate to pay the TTD or the medical bills received; then they raise the reserves a small amount to cover the current expense. This approach to reserving has become known as “stair stepping” because if you place the reserves on a graph, it looks like a set of steps. “Stair stepping” the reserves is not a good approach to reserving.
The best way for the work comp adjuster to set the reserves is for the adjuster to review the most current medical reports, both the treating physician’s report and any IME report, and evaluate the value of the claim based on the nature and extent of the injury. With the medical information and the use of the reserve worksheet, the adjuster can calculate the probable ultimate value of the claim. The ultimate value of the claim is the amount for the proper reserve of the claim.
On the more complex lost time claims, there will be a need to adjust the reserves as the information available to the adjuster changes. When the adjuster receives the medical report placing the employee at maximum medical improvement, the adjuster then reevaluates the reserves to see if they are still correct for the file.
Most reserve changes are increases, but there are situations where the reserves should be decreased (not just when the claim is closed). For instance, when the adjuster did the initial reserve at case creation, the employee’s fractured tibia was a compound fracture and the adjuster, based on prior experience, set the permanent partial disability (PPD) rating at 25%. The final medical report is received and the treating physician gave the employee a 10% rating. As the adjuster realizes an IME or a peer review could result in a higher rating for the employee, the adjuster accepts the treating physician’s rating. Barring jurisdictional practice that would raise the physician’s rating, the adjuster would need to lower the PPD reserve.
Note: The PPD reserve should be lowered the same day the adjuster reviews the treating physician’s report, not a month or months later when the file is finalized and closed.
Another example of when to lower a reserve is when the TTD reserve was set initially for the employee to be off work for 12 weeks, but the employee convinces the treating physician and the employer to allow him to return to work full time on light duty. Again, the adjuster lowers the reserve on the TTD to reflect the actual status of the claim.
While the debate whether reserving is art or science will continue, the good work comp adjuster is flexible and accurate by adjusting the reserves up or down in a timely way to reflect the known information about the nature and extent of the employee’s injury.
*Note: Workers’ compensation is one type of property/casualty insurance.
Author Rebecca Shafer, J.D. President, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, health care, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. He can be contacted at: Becki@ReduceYourWorkersComp.com or 860-553-6604.
WC Calculator: http://www.reduceyourworkerscomp.com/calculator.php
Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers’ comp issues.
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