• Menu
  • Skip to main content
  • Skip to secondary navigation
  • Skip to primary sidebar
  • Skip to footer

Before Header

  • About
  • Contact
  • Privacy
 
Paradigm

Amaxx Workers Comp Blog

Reduce Workers Compensation Costs By 20-50%

Header Right

  • Home
    • Training Center
  • Search
    • Free Resources & Solutions
    • Subscribe to Free Newsletter
    • Create Free Training Center Account
    • Enroll in On-Demand Courses
    • Activate WC Mastery Membership
    • Request Strategic Coaching Session
    • Buy WC Guidebooks
  • Membership
    • Insider (free account)
    • WC Mastery
    • Teams & Managers Mastery
    • Training Partners
  • Products
    • On-Demand Courses
    • Specialty Courses
    • Certifications & Mastery Courses
    • Ultimate Guidebooks
    • Coaching
  • Blog
    • Video Blogs
    • COVID-19 / Coronavirus Pandemic
  • Login

Mobile Menu

  • Home
    • Training Center
  • Search
    • Free Resources & Solutions
    • Subscribe to Free Newsletter
    • Create Free Training Center Account
    • Enroll in On-Demand Courses
    • Activate WC Mastery Membership
    • Request Strategic Coaching Session
    • Buy WC Guidebooks
  • Membership
    • Insider (free account)
    • WC Mastery
    • Teams & Managers Mastery
    • Training Partners
  • Products
    • On-Demand Courses
    • Specialty Courses
    • Certifications & Mastery Courses
    • Ultimate Guidebooks
    • Coaching
  • Blog
    • Video Blogs
    • COVID-19 / Coronavirus Pandemic
  • Login
  • About
  • Contact
  • Privacy
You are here: Home / Claim Management / The Dangers of Under-Reserving

The Dangers of Under-Reserving

March 13, 2019 By //  by Rebecca Shafer, J.D.

The Dangers of Under Reserving Under-reserving in workers’ compensation is a dangerous practice.

A basic principle of business solvency is to have an asset to offset each liability. A workers’ compensation claim is a legal obligation – a liability for the company, whether it is a contractually assumed liability through an insurance policy for an insurance company, or a retained liability through self-insurance. A claim reserve is an estimate of what the workers’ compensation claim will cost. When the adjuster handling the work comp claim establishes a reserve on the claim file, it is a definite amount of dollars that are being set aside to pay the future cost of the work comp claim.

Click Link to Access Free PDF Download

“How Do I Get My Adjusters To Follow My Account Handling Instructions?”

Under-Funded Liability Will Eventually Experience Shortfall

From an accounting standpoint, a claim is an incurred liability, even though it will be paid in the future. When the reserve is established by the adjuster, the company loses the ability to use the amount of money that has been set aside to pay the work comp claim. Inaccurate reserving, whether the reserves are excessive or inadequate, distorts the company’s financial condition. When the reserves are too high, money the company could use in other aspects of the business is no longer available for use by the company. When the reserves are too low, the company has an underfunded liability. This creates a situation where the company will eventually experience a shortfall.

While both over-reserving and under-reserving present an inaccurate picture of the company’s financial health, most financial people will argue that under-reserving is worse for the company. The reason for this is simple – the self-insured employer or the insurance company must have adequate reserves to meet their obligations. If the reserves are inadequate, the self-insured employer or the insurance company runs the risk of insolvency.

When the self-insured employer or insurance company has understated their reserves, they have overstated their assets and have understated their liabilities. The difference between the amount of assets an insurance company has and the amount of liabilities an insurance company has is referred to as the insurance company’s surplus. An insurance company’s ability to pay claims is evaluated by measuring its surplus in comparison to their outstanding obligations.

Evaluated By Ability To Pay Claims

Insurance rating firms like A.M. Best measure the financial stability of an insurance company by evaluating their ability to pay their claims. If the insurance company has understated their reserves, they may temporarily increase their financial stability rating, but when the claims come due (are paid) and the available surplus drops, the financial stability rating of the company will be downgraded. A downgrade in an insurance company’s financial stability rating results in fewer potential buyers of their insurance products because doing business with the downgraded insurance company is considered riskier.

An example of how under-reserving of work comp claims can impact the surplus is as follows (to simplify, the insurer has no other liabilities except claims).

Total assets Total Claim Reserves Total surplus

$10,000,000 $8,000,000 (under reserved) $2,000,000

$10,000,000 $9,500,000 (properly reserved) $500,000

In this example, when the reserves are understated, it appears the insurance company has a surplus of 20% of assets, but in actuality, the surplus is only 5% of assets.

FREE DOWNLOAD: “How Do I Get My Adjusters To Follow My Account Handling Instructions?”

Reserving Practices Subject to Audits

All jurisdictions regulate the financial stability of self-insured employers and insurance companies. The reserving practices of the self-insured employers and insurance companies are subject to periodical audits by the state insurance department or other state regulatory agencies. When the self-insurer or the insurance company is audited, if the reserves are inadequate to pay all open claims (and technically, all claims that have been incurred but not yet reported), the state insurance department will require the self-insured employer or insurance company to increase the reserves to cover their obligations on their claims. If the self-insured employer or insurance company does not have the assets available to place in reserve for those claims, the state insurance department will shut the company down.

Another aspect of under-reserving is the impact on the calculation of future premiums. The reserves on the open claims are a part of the calculations in establishing the loss experience of the company. If the loss experience is understated because the reserves are understated, the insurance company will be charging inadequate premiums, resulting in lower profits for the company, or even pushing the company quicker to insolvency.

Proper Reserving Is Essential

To accurately reflect the self-insured employer’s financial position or the insurers financial position, proper reserving for the claims is essential. Under-reserving impacts the financial stability of the company, as the shortfall in reserving will eventually be corrected by taking the shortfall from the company’s surplus. If you have any doubts about the adequacy of the reserves on your workers’ compensation claims, please contact us as we can recommend claim auditors that will verify the adequacy of your claim file reserves.

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 co-author of the #1 selling book on cost containment, Workers Compensation Management Program: Reduce Costs 20% to 50%. Contact:.

Contact: RShafer@ReduceYourWorkersComp.com.

Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/

©2019 Amaxx LLC. All rights reserved under International Copyright Law.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

FREE DOWNLOAD: “How Do I Get My Adjusters To Follow My Account Handling Instructions?”

Filed Under: Claim Management

Related Articles

WC Cost Containment For The Claims Management Team

WC Cost Containment For The Claims Management Team

Dealing with Long COVID in Work Comp

Dealing with Long COVID in Work Comp

Effective Claim Handling for PTSD Claims

Effective Claim Handling for PTSD Claims

Expecting the Unexpected in Work Comp – Part 2

Expecting the Unexpected in Work Comp – Part 2

Expecting the Unexpected in Work Comp

Expecting the Unexpected in Work Comp

Subrogation Equals Lost Gold In Workers Compensation

Subrogation Equals Lost Gold In Workers Compensation

Employers: Avoid These Mistakes that Cost Your Work Comp Program Money

Employers: Avoid These Mistakes that Cost Your Work Comp Program Money
workers' comp Investigation

Special Investigation Unit: Stop Fraud with Proper Training

Special Investigation Unit: Stop Fraud with Proper Training
11 Ways to Manage Employer, Provider, and Employee Fraud in Workers’ Compensation

Snuff Out Fraud to Reduce Work Comp Costs

Snuff Out Fraud to Reduce Work Comp Costs

Identify Employer Contacts to Provide Adjusters Work Comp Claim Information

Identify Employer Contacts to Provide Adjusters Work Comp Claim Information

15 Point Checklist For Your Account Service Instructions

15 Point Checklist For Your Account Service Instructions

Internal Auditing Is Not Just For The Self Insured

Internal Auditing Is Not Just For The Self Insured

Free Download

How Do I Get My Adjusters To Follow My Account Handling Instructions? - FREE Download Click Here Now!

Train to Succeed

BECOME CERTIFIED IN WORKERS’ COMPENSATION

Proven Course Catalog & WC Toolbox Give You The Power To Achieve Lower Costs and Better Injured Worker Outcomes

VISIT WORKERS' COMP TRAINING CENTER

Previous Post: «workers compensation adjuster Six Things that Drive Workers Compensation Adjusters Crazy
Next Post: 10 Helpful Tips For Managing Angry Workers’ Comp Claimants »

Primary Sidebar

FREE DOWNLOAD

How Do I Get My Adjusters To Follow My Account Handling Instructions? - FREE Download Click Here Now!

Our Sponsors

ARCADIA - Enhancing Settlement Outcomes

The Structured Settlements Company
 

Catastrophic and Risk Solutions, Case Management Solutions, and Specialty Networks
 

MSAs, Section 111 Audits, & Conditional Payment Resolutions
 

Post-Settlement Administration
 

Medcor

Injury Triage, Onsite Clinics

Read Our Award-Winning Blog

Blog Categories

Search Our Archive

Subscribe to Our FREE Newsletter

Return-to-Work Essentials

Footer

Search Our Archive

Search our continually growing archive of over 2500 articles about Workers' Comp issues.

Quiclinks

  • Calculators
  • Terms & Abbreviations
  • Glossary of WC Premium Terms
  • WC Resources
  • Best Practices
  • Industries
  • Return-to-Work Essentials

RSS Recent Blog Posts

  • WC Cost Containment For The Claims Management Team
  • Dealing with Long COVID in Work Comp
  • Common Mistakes: Medical Care and Accepting Every Claim – Article 3 of 3
SUBSCRIBE TO OUR FEE NEWSLETTER
Let Us Help You Stomp Down the High Cost of Workers' Comp!
Top of Page ↑
  • Home
  • Training Center
  • Search
  • Membership
  • Products
  • Blog
  • About
  • Contact
  • Subscribe
  • Login
Copyright © 2023 Amaxx, LLC. All Rights Reserved. · Privacy Policy / Legal Notice