Uses of Claims Reserves
- Case reserves are used by the rating bureaus to help determine the pricing of workers compensation insurance. Their calculation uses the case reserves on the clams files at 18 months after the inception of the insurance policy.
- Actuaries rely on claims reserves to help determine the projected ultimate cost of the claims. They calculate a reserve loss development factor which is applied to the case reserves. Their calculations use industry trends, paid losses and case reserves.
- IBNR includes natural reserve loss development on open claims as well as increased cost for re-opening of closed clams. It is also the expense of claims which have not been reported.
- Reserves are used by the insurance company or self-insured company to help measure their outstanding liabilities.
- Reserves are used by the insurance department to help calculate the financial solvency of insurance companies.
- Reserves are used to determine the collateral required to pay for the workers compensation losses should a self insured become insolvent.
- Reserves are used by insurance companies when calculating the value of a loss portfolio transfer.
- Reserves are used by insurance companies to determine collateral requirements when there are insurance policies where the insured takes some of the risk
- Reserves are used by clams management to help identify and focus on expensive or problematic claims.
- In an effort to manage the financial exposures of a claims office, there is a hierarchy of reserving authority, with the lowest being the claims trainee and the highest being the VP of claims or the CEO of the company.
- An ideal reserving process identifies problematic claims within a few months of the date of injury.
Reserving Axioms
- Reserving is an art as much as it is a science.
- The reserves should generally accurately reflect the true exposure of the claim.
- Claims examiners file handling skills are reflected in their reserving pattern.
- The skill of the claims supervisor will have a direct impact on the reserving pattern of their claims examiners.
- As the claims management process evolves, treatment and payment authorization processes are being taken from the front line examiner. This results in fewer experiences and less information for the examiners to use to educate themselves on the costs of the system. This evolution has had an impact on accurate reserving.
- An examiners reserving pattern can be negatively impacted by the reserving authority (or lack thereof) given to the claims examiner.
- Reserving authority and settlement authority are not the same thing.
- Every open file is not accurately reserved.
- When a claim is permanently closed it is accurately reserved.
- If a book of claims are “accurately reserved” then the “salvage” which is captured when files are closed will offset the natural reserve loss development as cases mature.
- The aggregate case files for every book of business are under reserved.
- Changing of a reserving philosophy are always problematic.
- It takes up to five years for an actuary to recognize and incorporate a reserving trend into their results. It also takes up to five years for any problems associated with reserving mischief to fully be expunged from the actuarial report.
- A change in the use of clams systems by the examiners always has a direct impact on the reserving process. Sometimes good and most of the time not so good.
- If there is a change in claims systems, even if there is no change in reserving philosophy, the data extracts to the actuary may be problematic
- Actuarys who are analyzing publicly traded companies, usually obtain data extracts (value) of the reserves and paid trends at the end of June, September and December.
- Any files that remain open past 180 days are problematic and need accurate reserves
- Any claims system that has “auto reserves” should be regularly audited.
- Claimants who are obese, have any identified co-morbidities or are over 65 years of age should have at least 20% higher reserves than similar injuries and similar job types.
- Employers believe that claims examiners will settle the claims for a lower cost if the reserves are suppressed.
Observations and comments on reserving
When managing claims offices it is useful to review the monthly claims reserving report. This report provides the number of reserve changes and the total amount of the reserves by claims adjuster.
Good claims adjusters have fewer reserve changes and usually have larger individual reserve changes. Claims examiners who have a high number of reserve changes with small dollars are doing stair step reserving. They are churning their clams and are not accurately identifying the exposures.
There is a financial incentive for employers and brokers to encourage claims examiners to under-reserve the case files.
Artificial pressure from employers and brokers to under reserve claims has the following impacts:
- It increases the difficulty in getting the claim closed on a timely basis
- It creates problems with accurately identifying high exposure claims which may result in those claims not getting an appropriate focus.
- It spoils the relationship between the broker and the claims department resulting in impaired communication.
Catastrophic injuries have their own reserving and authority process. Due to medical advancements quads and other severely injured workers are living longer. Life company impairment tables can be problematic for the reserving of catastrophic claims.
Some systems automatically add reserves to the closed files if there is a bill paid on the closed file. Other systems require a re-opening of the file and a re-setting of the reserves before a bill can be paid on a closed file. Both are problematic if the actuary is not aware of how bills are paid on closed files.
Most claims systems reserving processes require individual reserves on each “line” such as Med, TD, PD, and Legal. It is possible to be over reserved on one of these line items and under reserved on another line item.
When files are under-reserved they can impair the prompt payment of medical bills, due to needing an increase of reserves in the medical line.
Future medical claims are rarely reserved with a calculation which includes an appropriate medical inflation rate.
The reserves on the claims should be reviewed prior to every “unit Stat” reporting of the reserves to the rating bureau. Any significant change in the claims for the unit stat reporting should be reviewed for mischief on the part of the employer or broker or for a lack of accurate identification of exposure on the part of the claims examiner.
Top Ten
The 10 Most Common Reserving Issues Identified During the California Office of Self Insurance Programs Audit
- Not identifying all issues on a claim and the associated probable future cost, indemnity and/or medical, over the life of the claim based on the facts of the case. 8CCR§15300
- Failing to annually review medical treatment costs and reserve adequacy when the injured worker has a lifetime medical award. Not adjusting reserves upon receipt of relevant information that affects the valuation of the claim. 8CCR§15300(g)
- For MMI/P&S status claims – Not adjusting reserves to reflect the average annual medical treatment costs based on the past three years (or less if it has been less than three years since the injured worker has reached an MMI/P&S status). 8CCR§15300(b)(4)
- For non MMI/P&S claims – Not reserving for the life of the claim. 8CCR§15300(b)(3)
- Using the wrong life expectancy table when calculating estimates of future liability. 8CCR§15300(b)(7), 8CCR§15300(b)(9)
- Failing to reserve for the higher permanent disability rating unless there is sufficient factual evidence to support a lower rating. 8CCR§15300(b)(2) and lowering permanent disability due to apportionment without basis or facts to support it, 8CCR§15300(b)(8)
- Inaccurately reporting excess insurance information.
- Allowing the self-insured employer to control estimates of future liability. 8CCR§15452
- Failing to determine the outstanding lien and unresolved unpaid medical provider balances and the expected cost of resolution based on the facts of the case. 8CCR§15300(b)(1)
- Prematurely closing claims with lifetime future medical benefits due. 8CCR§15400.2(a)
Reserve philosophy
A reserve philosophy should:
- Creates a consistent reserving pattern for the actuary.
- Be easy to implement with temp examiners as well as permanent staff.
- Be based on a plan of action to bring the case to a conclusion
- Be based on a plan of action timelines such as 14, 45, 90 and 160 days.
- Allow and encourage the examiner to change the plan of action and reserves as the file facts change.
- Help early identification of cases with a large potential.
- Provide an “accurate” understanding of potential liabilities
- Limit wide variants changes in trends to assist actuary
- Promotes early closure of files
- Encourage and allow accurate payment of benefits and timely and accurate payment of settlements
- Recognize valuation points by actuary (end of June and end of December)
- Allow the actuary to rely on reserving patterns as well as paid patterns
- Targets 90% accuracy at 12 months from DOI (180 days)
- Assist with achieving closure goals
- Be easy enough to implement that there can be a reasonable expectation of productivity by the examiner and the supervisor
- That results in early identification and reporting of all potential excess files to reinsurance
Reserving timelines
Inception of file.
When the claim is accepted delayed or denied
On a regular diary timeline (usually 60 days)
When claim is litigated
180 days from date of injury
Three weeks prior to first unit stat reporting
Prior to file review with the employer, or internal file case staffing review.
When TD is ended and or the injured worker returns to work
When any medical legal report is received
Upon settlement
Annually (on the anniversary of the first unit Stat file reporting) for future medical claims
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