Lower Your Workers Comp Premiums – Do Reserve Audits Before This Secret Date

Each workers compensation file has a reserve set on it. A reserve is an estimated amount of money that will be needed to pay the cost of the workers compensation claim. Determining the correct amount of money that is needed for each claim file is a combination of knowledge and experience. The work comp adjuster needs to be both accurate in the original estimation of the reserves needed, and flexible to adjust the reserves up or down when the information that affects the reserves changes. Read on to find out how to time your audits so they benefit you. If you wait too long, the benefit will be reduced.

 

 

To properly establish the reserves on a work comp claim file, the adjuster needs to know the average weekly wage of the employee, the estimated amount of time the employee will be off work, the estimated amount of disability the employee will incur from the accident and the nature and extent of the medical treatment. To assist the adjuster in establishing these reserves, insurers, self-insurers and third party administrators will provide their adjusters with a reserve calculation sheet that includes spaces for each of the following three types of

monetary expenditures: (WCxKit)

 

 

1.      Temporary Partial Disability (TPD)

2.      Temporary Total Disability (TTD)

3.      Permanent Partial Disability (PPD)

4.      Permanent Total Disability (PTD)

5.      Rehabilitation/Vocational Expense

6.      Death Benefits

7.      Dependent's Benefits

 

1.      Physicians

2.      Hospitals

3.      Diagnostic Testing

4.      Specialists

5.      Medication & Durable Medical Care

6.      Transportation Expense

7.      Attendant Care

 

3. Expenses

1.      Medical Reports

2.      Experts

3.      Peer Reviews and/or IMEs

4.      Attorneys

5.      Court Cost

6.      Surveillance

7.      Other expenses

 

 

Most adjusters follow this or a very similar outline in their initial reserve calculations. The Best Practices of the insurance industry and the individual Best Practices of most claims organizations will require the adjuster to establish the claim file reserves early on in the claims handling.

 

 

Where most adjusters and claims offices fall down is on verifying the accuracy of the reserves over time. The initial reserves are often accurate enough, but become inaccurate as the facts of the claims develop further.   There are many factors that can make the original reserves on the file inaccurate including:

 

 

1.      the medical treatment last longer or is shorter than expected,

2.      the employee is off work longer than originally estimated or returns to work sooner than originally estimated,

3.      the medical status of the employee deteriorates,

4.      the employee recovers faster than normal,

5.      the disability rating for the employee is higher or lower than expected,

6.      the claim becomes contested before the work comp board.

7.      When any of these developments occur and the adjuster does not adjust the reserves, the reserves become inaccurate.

 

 

Inaccurate reserves can be either higher than needed or lower than needed. Either scenario creates issues and problems for the insurer, or the employer or both the insurer and the employer. 

 

 

Inadequate reserves have a negative impact on the insurer. When the reserves are too low, the insurer has more money on the financial books of the company to undertake new business or to use for other business purposes. However, eventually the claims with the inadequate reserve have to be paid, forcing the insurer to liquidate other assets to provide the monetary funds to pay the claims. This has a negative effect on the company's financial stability ratings with insurance rating firms and with regulatory department of state governments.

 

 

Under reserving also has a negative impact on the insurance premiums the insurer charges. Insurance premiums are calculated on both the frequency of claims and the severity of claims. Under reserving leads the insurer to believe the severity is milder than it actually is, resulting in the insurer charging inadequate premiums on both renewal business and new business in the same rating category.

 

 

Excessive reserves – over reserving — have a negative impact on the employer. When the reserves are too high, the insurance company is lead to believe the severity of the claims is greater overall than it actually is. The insurer raises the premium charged to the employer to compensate for what the insurer see as a riskier book of business. 

 

 

Under reserving or over reserving is normally minimal on the medical only claims and the small indemnity claims. Where under reserving or over reserving has a major impact on the insurer or employer is on the larger indemnity claims where the employee has a serious medical issue.   A reserving error of $1,000 will normally have little impact on either the employer or insurer. A reserving error of $100,000 can have a significant impact, especially on the smaller or mid-size employer.

 

 

Adjusters do not set out to have inaccurate reserves. Inaccurate reserving usually occurs because either the adjuster is not paying attention to the reserves, or the adjuster does not understand the impact of the medical, indemnity or legal issues on the claim. Either way, the reserves need to be corrected. The best way to verify reserves are correct is to have a reserve audit.

 

Reserve audits can be conducted by:

 

1.      the claims office itself

2.      the insurer

3.      the employer's broker

4.      an independent claims auditor

 

 

Timing is important to maximum the effect of your reserve audits. If you want the reserve audit to impact your workers comp premium charges, the audit needs to be completed AND THE RESERVES CORRECTED before the Unit Statistical Date (known as the "unit stat date".) The unit stat date is 6 months before the effective date of the experience mod.  The data from the unit statistical loss run (both the frequency of claims and the severity of claims) is used to calculate the experience mod for the next premium adjustment.  So doing a reserve audit a few weeks before the unit stat date won't help reduce your next annual premium…schedule it early.

 

Many employers, and some insurers, will take the approach of telling the claims office to self audit all of its reserves. This can result in some of the reserving errors being corrected, but many or most reserving errors are missed. If the adjuster did not realize before the claims office self audit that the reserves were in error, the adjuster will often make the same mistake again. Plus, the adjuster has self-interest in the reserve audit outcome (his/her performance evaluation being impacted by the number of files improperly reserved).

 

 

The insurer can perform the reserve audit, but the insurer can also be biased. If the claim files are under reserved and the insurer is struggling to maintain adequate capital, they can be biased against raising the reserves too quickly. On the other hand, if the reserves are set too high, an insurer can justify a higher than necessary premium.

 

 

Employers often think they can bring in their insurance broker to review the claim reserves. Many brokers have the claims background needed to understand the medical, indemnity and legal issues of the larger, complex claims, but there are a few who do not, so ask your broker if this is their area of expertise and if not hire an independent to work with the broker or go solo.

 

 

The best approach for reserve auditing is to hire an outside, independent claims auditor to work in conjunction with your broker. The independent claims auditor has no self interest to protect. The independent claims auditor who has extensive claims experience handling complex medical and legal issues is the best qualified person to accurately evaluate the claim reserves on each claim reviewed. (WCxKit)

 

 

If as an insurer, you feel the third party administrators claims office(s) or your own claims office(s) are not getting the reserves right, it is in your financial self interest to get them corrected. If as an employer you believe the reserves of the insurers claims office(s) or the third party administrators claims office(s) have the reserves set too high, you can often reduce the size of your future work comp premiums by having a reserve audit. If you need any assistance in identifying an independent claims auditor for a reserve audit, please contact us.