Over Reserving — Or How to Impress the Boss

The claims quality control auditor noticed something unusual on the first file of the workers compensation claims audit. The auditor quickly realized the error he noted on the first claim file had been made on the second file, third file…….every file in the audit. It was a very unusual error, too. Every claim file was grossly over reserved, not just within the margin of being overly cautious, but on average four to five times the amount of total reserves that would normally be needed.

 

 

The claims office was operated by one of the largest third party administrators (TPA) in the country with an odd exception. The exception was the claims manager who was an employee of the self-insured employer. Everyone in the claims office – approximately 40 employees, who were employees of the TPA, reported through the office chain of command to the claims manager. (WCxKit)

 

 

In the first file reviewed where the claims auditor first noticed the over reserving, the claimant had a crushed finger. As the state where the injury occurred had a chart for Scheduled Injuries for limbs, hearing and vision, the maximum the self-insured employer could pay on the claim per the Schedule of Injuries for the state was $10,220.   The indemnity reserve? $50,000. A back injury with a 10% rating had a $500,000 reserve. An ankle sprain had a $200,000 reserve.   What the heck was going on?

 

 

In interviews with the staff, the claims auditor learned the claims manager was providing the reserve amount he wanted on every indemnity claim. In a discussion with the claims manager, he stated he had been instructed by his boss back at the self-insured employer to make sure there were adequate reserves on every claim. It became apparent to the auditor that the claims manager, who was put in charge of the work comp claims office, had only basic knowledge of workers compensation. All of the work comp adjusters realized the reserving was way high, but were following the manager's instructions. 

 

 

The auditor realized that the gross over-reserving was causing the self-insured employer to have way too much money set aside for the workers compensation claims. Instead of the approximate $25 million they needed in reserves for their indemnity claims, the company had over $110 million in indemnity reserves. The extra $85 million in reserves was a substantial amount of cash for the self-insured employer. So much in fact, that the self-insured employer was borrowing money to meet its other financial needs to operate their business.

 

 

The claims auditor took the unusual step of contacting the Chief Financial Officer (CFO) to see why the self-insured employer was grossly over reserving every claim file. It did not take long for the claims auditor to realize the CFO (and for that matter, the entire senior management of the self-insured employer) knew nothing about workers compensation or the operation of a claims office.

 

 

The CFO was ebullient in his praise of the workers compensation claims manager, stating “he does a fantastic job of managing the work comp claims, he gets almost every claim settled for 20 to 25% of what they would normally cost.” When the CFO was questioned about his knowledge of work comp, he admitted he had none. In further discussion, it came to light that the CFO was determining what they would normally cost  by the amount of reserves set on each claim file!

 

 

The claims office manager who reported to the CFO was intentionally overstating the reserves on each work comp indemnity claim. His purpose? Simply to look good and impress his boss on what “ a fantastic job” he was doing in managing the claims office.   In reality, the TPA's claim staff was doing an adequate job on the claims, but not a fantastic job by any means. On average, the work comp claims were settling for what they worth.

 

 

The claims file auditor, seeing that neither the claims manager nor the CFO had an understanding of how the gross over reserving was impacting the ability of the self-insured employer to manage their company's financial operations, realized something needed to be done. The auditor decided to assist them without embarrassing the claims manager for his intentional over reserving or embarrassing the CFO for his lack of understanding of what was happening.

 

 

The auditor invited the CFO to attend the audit wrap-up session with the claims manager. In the wrap-up discussion, the auditor noted on average, the claims were consistently settling for 20 to 25% of the reserve amount. The auditor asked the claims manager if there was any reason the office could not continue to settle the work comp claims as they had been doing. The claims manager acknowledged they should be able to continue to settle the work comp claims along the same lines as they had been doing. The auditor recommended that since the claims were almost always settled for less than 25% of the reserve amounts, that the reserves across the board be reduced by 75% each (which left all the files adequately reserved for their ultimate settlement value). (WCxKit)