How To Properly Reserve a Work Comp Claim

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.
 
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. [WCx]
 
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

 


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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.

 

©2012 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact us at: Info@ReduceYourWorkersComp.com.

How Reserves Are Calculated

One of the most important functions  of the workers’ compensation adjuster is the establishment of reserves on each claim file. The reserves for the claim file are the amount or number of dollars needed to cover the legal and financial obligations of the insurer arising from the workers' compensation claim. Sarbanes-Oxley and other regulations require insurers to account accurately for their liabilities, which would include the workers' compensation claims of the insurer. 
 
The three types of reserves normally established on every lost time workers' compensation claim are indemnity reserves, medical reserves and expense reserves. The work comp adjuster should use a reserve work sheet to analyze the amount needed for each type of reserve on the claim file. If the adjuster does not take time to formulate properly the amount of reserves using a reserve worksheet, it is often said the adjuster is using the “wag” method…….the wild ass guess method. 
 
For an accurate analysis of what dollar amount is needed for each of the reserves, each of the three types of reserves are further divided into various subcategories. To assist our readers we will provide these subcategories as we illustrate the three main types of reserves.
 
INDEMNITY RESERVES:
Indemnity reserves are establish to pay the employee a disability benefit for the time the employee is unable to work or to compensate the employee for the partial or total loss of a body function. The five types of indemnity reserves are temporary total disability (TTD), temporary partial disability (TPD), permanent partial disability (PPD), permanent total disability (PTD) and death benefits. 
 
To establish the amount of the initial reserves for TTD, TPD, PPD and PTD, the work comp adjuster using a reserve worksheet, either paper or electronic, will calculate the employee's average weekly wage (AWW) from the payroll information provided by the employer. The average weekly wage will be multiplied by two-thirds (in most jurisdictions) to determine the “comp rate”–the amount the employee will be paid for each week the employee is unable to work. 
 
In this example we will have an employee earning $750.00 per week and a comp rate of $500.00 per week. Based on the nature of the injury and the initial medical report, the adjuster anticipate the employee will be off work 12 weeks, will return to work on light duty, one-half days, for another 6 weeks, and then will return to work full time with a 5% permanent partial disability rating (with a 100% rating equal to 400 weeks).
 
The calculations on the reserve worksheet would look like this:
          TTD weeks___12___ X comp rate $500  =      $6,000
          TPD weeks       6        X comp rate $250  =      $1,500
          PPD weeks      20       X comp rate $500  =     $10,000        (5% of 400 = 20)
          PTD weeks________ X comp rate _____ =      ______
          Other benefits                                                 ______
          Total Estimated Indemnity Reserve                  $17,500
 
In this example the PTD section is left blank as there is no reason to believe the employee will be permanently disabled. The “other” benefits section which could include death, burial, disfigurement or spousal/dependent indemnity is blank because none of them would apply. 
 
MEDICAL RESERVES:
In the medical reserves the work comp adjuster will estimate the anticipated medical cost for each type of medical treatment the injured employee will need. The skilled adjuster who has handled numerous work comp claims in the jurisdiction will normally be accurate within 10%-15% of the final medical cost of the routine claim. 
 
To establish the amount of the initial medical reserve, the adjuster will estimate the cost of each type of anticipated medical service. Based on the nature of the injury and the initial medical report, the adjuster anticipates the medical services the employee will need. The medical section of the reserve worksheet will look like this:
          Physician fees         $3,000                    Hospital fees           $5,000
          Surgical cost           $4,000                    Physical Therapy     $2,500
          Diagnostic test        $1,000                    Drugs                        $   500
          Ambulance              ______                   Attendant Care        ______
          Medical Rehab.       ______                   Other                        ______
          Total Estimated Medical Care Reserve             $16,000
 
In this example the medical care cost the adjuster does not expect to be incurred on the work comp claim are left blank.
 
EXPENSES:
There is much more variance in how insurance companies approach reserving for expenses then there is in the reserving for indemnity benefits or medical benefits. Some insurance carriers will have only one reserve for all claim expenses, while other insurance carriers will have separate expense reserves for litigation, vocational rehabilitation, private investigators, etc. 
 
There are claim cost that do not neatly fit into expenses or medical. Independent medical evaluations, medical record fees, medical management fees and medical equipment rental will be included in the medical reserve by one insurance carrier and will be included in the expense reserve by the next insurance carrier. For the purpose of this explanation of reserves, we will include these items under the expense reserve. 
 
Based on the nature of the injury and the initial medical report, the adjuster anticipates the expenses associated with the work comp claim file handling and getting the claim approved at the work comp board.   The expense section of the reserve worksheet will look like this:
          Independent Medical Exam          $   750     Medical Record Fees     $   250
          Medical Management Fees          $2,500    Vocational Counseling    ______
          Job Assessment Fees                 ______   Vocational Training         ______
          Defense Counsel 20 hrs x $150   $3,000   Subpoenas/Transcription  ____
          Expert witnesses              ______      Work Comp Board cost  $   500    
          Surveillance ____ x _____        ______         Other expenses     _____
          Total Estimated Expense Reserve     $7,000
 
In this example the adjuster does not anticipate incurring any cost for vocational rehabilitation, for expert witness or for surveillance. 
 
 
TOTAL CLAIM RESERVES:
In our sample reserve worksheet, the adjuster’s initial evaluation of the claim includes $17,500 for indemnity benefits, $16,000 for medical benefits and $7,000 for claim expenses, for a total reserve on this work comp file equaling $40,500 ($17,500 + $16,000 + $7,000). 
 
The adjuster knows the reserve may need to be changed when additional medical information becomes available of there are other developments within the claim. The employee could recover faster than anticipated and the indemnity reserves would be adjusted downward.   Or, the employee's surgery does not go well and the surgery has to be re-done. The employee is off work longer than anticipated and the medical cost is higher than originally expected, resulting in the indemnity reserve and the medical reserve being increased. (workersxzcompxzkit)
 
The adjuster needs to be both flexible and accurate at the same time in establishing and updating the claim file reserves. By applying the experience the adjuster has with careful consideration of the cost related to the employee's injury, the adjuster should be able to maintain accurate reserves on the work comp claim file.

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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.
 
©2010 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact Info@ ReduceYourWorkersComp.com.

Establishing and Keeping Proper Reserves on a Workers Compensation Claim

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. 

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. (workersxzcompxzkit)

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.

We accept articles about WC cost containment. Contact us: Info@ReduceYourWorkersComp.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.

©2009 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact Info@ReduceYourWorkersComp.com

Workers Compensation Loss Run Contains Important Information

Having loss runs  is not a privilege, but a right of the policyholder.  If your company is unable to have online access to your claims, at least the loss run will contain some very pertinent information. If any insurance carrier has a claim open from even 20 years ago, your company should be provided a loss run for that claim.

 

This may be  a good time to pull out your company’s loss run and look at the numbers. Recently when reviewing one for a transportation company it was discovered their E-Mod (experience modification factor) increased from .9 to 1.6 in two years.

 

One of the main  pieces of advice to give to an employer is that the E-Mod cannot be fixed in one year. It usually takes 2 – 5 years. Why? The E-Mod is calculated from claims that have been open for less than four years. That is not an exact statement, but an effort to keep this as straightforward as possible.

 

The main number  to examine is the outstanding reserve, reserve, unpaid funds, etc. The outstanding reserves may be named with different terms. Regardless, it is the $ that has not yet been paid out on a workers’ compensation claim.

 

The outstanding reserves  are the forecasted payouts by the adjuster for the lifetime of the file.  And, as it is often said, even though the money has not been spent, it is charged off directly to your E-Mod, which in turn heavily affects your premium.

 

The basic formula  is Paid Funds + Outstanding Reserves = Total Outstanding Reserves.

 

The total outstanding  reserves are the figures your insurance carrier reports to the NCCI or the State Rating Board.

 

There is little  you can do about what has already been paid. There are a few specialists who can review the paid funds to see if there were very many overpayments.

 

The quickest  way to cover the claims affecting your company’s E-Mod is to look at claims that are five years old or less. The outstanding reserves for these claims need to be reviewed. If you look at any of these claims and the $ amount of the outstanding reserves seems too large for the injury, you may have found a way to cut your workers’ comp costs.    (workersxzcompxzkit)

 

Author James J. Moore,  AIC, MBA, ChFC, ARM  is a national Workers’ Compensation premium and reserve expert. He is the founder and principal of  J&L Risk Mgmt Consultants, Inc., a Workers’ Comp advisory company. http://www.cutcompcosts.com/www/blog.html.  Mr. Moore has allowed WCK Blog to reprint the above blog with minor edits.  Thanks, Jim.

 

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©2008 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact Info@ReduceYourWorkersComp.com

 

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