When a workers’ compensation claim occurs, the insurer incurs a financial obligation to pay the future cost of the claim. Proper accounting requires the insurer to set aside the amount necessary to pay the claim. While the exact cost of this future obligation is unknown, the insurer needs to estimate the future cost of the claim as accurately as possible in order to set aside the appropriate amount of money to pay the claim. The money set aside to pay the claim is referred to as the claim reserve. [WCx]
It is common practice in the workers’ compensation field to break the reserve down into components. The three major components of the reserve are:
- Medical cost
- Indemnity cost
- Expenses
Some insurers will break the expense component into two parts, expenses and legal.
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Medical:
To establish how much money should be placed in the medical component of the reserve, the workers’ compensation adjuster will estimate the cost of:
- Physicians
- Hospitals
- Diagnostic testing
- Physical therapy
- Ambulance
- Prescriptions
- Durable medical equipment
- Attendant care
- Other medical cost
A dollar amount is estimated by the adjuster for each of the above types of medical care based on the adjuster’s initial investigation establishing the nature of the injury and the level of severity of the injury. For a sprained ankle, the adjuster might assign the following amounts to each category:
- Physicians $1,000
- Hospitals
- Diagnostic testing $1,000
- Physical therapy $2,000
- Ambulance
- Prescriptions $ 250
- Durable medical equipment
- Attendant care
- Other medical cost _____
Total Medical Reserve $4,250
The medical reserving for an amputated hand might look like:
- Physicians $10,000
- Hospitals $25,000
- Diagnostic testing $ 2,000
- Physical therapy $ 5,000
- Ambulance $ 1,000
- Prescriptions $ 2,500
- Durable medical equipment $40,000
- Attendant care
- Other medical cost $ 2,000
Total Medical Reserve $87,500
Indemnity:
To establish how much money should be placed in the indemnity component of the reserve, the workers’ compensation adjuster will estimate the cost of:
- Temporary total disability (TTD)
- Temporary partial disability (TPD)
- Permanent partial disability (PPD)
- Permanent total disability (PTD)
- Rehabilitation / vocational expense
- Death benefits
- Dependent benefits
A dollar amount is estimated by the adjuster for each of the above types of indemnity benefit based on the adjuster’s initial investigation establishing the nature of the injury and the level of severity of the injury. For a sprained ankle, the adjuster might assign the following amounts to each category:
- Temporary total disability (TTD) $600 per week X 10 weeks = $6,000
- Temporary partial disability (TPD)
- Permanent partial disability (PPD)
- Permanent total disability (PTD)
- Rehabilitation / vocational expense
- Death benefits
- Dependent benefits _____
Total Indemnity Benefits $6,000
The indemnity reserving for an amputated hand might look like:
- Temporary total disability (TTD) $600 per week X 20 weeks = $ 12,000
- Temporary partial disability (TPD)
- Permanent partial disability (PPD) $600 per week X 250 weeks= $150,000
- Permanent total disability (PTD)
- Rehabilitation / vocational expense
- Death benefits
- Dependent benefits ________
Total Indemnity Benefits $162,000
Expenses:
To establish how much money should be placed in the expense component of the reserve, the workers’ compensation adjuster will estimate the cost of:
- Medical reports
- Independent medical examinations or peer reviews
- Experts
- Attorney
- Court reporters
- Surveillance
- Any other expense.
As with the medical component and indemnity component of reserving, an estimated amount is assigned to each expense category and the total estimated expenses is established.
Total Reserve:
The total reserve on the file is the combined amount of cost estimated by the adjuster for medical + indemnity + expenses.
The workers’ compensation adjuster should establish the initial reserve within 48 to 72 hours of the claim creation. The adjuster should review the reserve whenever there is important new information obtained that impacts both the amount and type of medical treatment, or impacts the amount of indemnity that will be paid. It is often the goal of the adjuster to establish the ultimate estimated value of the claim (reserve) within 6 months of the initial report of the claim.
Accurate reserving is very important to the insurer in establishing the amount of money to be set aside for the claim. Accurate reserving is also important to the employer as the severity of the claims, as reflected by the reserving, is a part of the calculations used by the underwriters in establishing the premium for future years.
Author Rebecca Shafer, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. She is the author of the #1 selling book on cost containment, Workers Compensation Management Program: Reduce Costs 20% to 50%. Contact: RShafer@ReduceYourWorkersComp.com.
Editor Michael B. Stack, CPA, Director of Operations, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: mstack@reduceyourworkerscomp.com.
WORKERS COMP MANAGEMENT MANUAL: www.WCManual.com
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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