Reserving Workers’ Compensation Claims

Uses of Claims Reserving

• The rating bureaus use case reserves to help determine the pricing of workers’ compensation insurance. This calculation uses the case reserves on the claim files 18 months after the insurance policy’s inception.
• Actuaries rely on claims reserves to help determine the projected ultimate cost of the claims. They calculate a reserve loss development factor applied to the cash reserves. Their calculations use industry trends, paid losses, and case reserves.
• The insurance or self-insured company uses reserves to help measure their outstanding liabilities.
• The Department of Insurance uses reserves to help calculate the financial solvency of insurance companies.
• Reserves are used to determine the collateral required to pay for the worker’s compensation losses should a self-insured become insolvent.
• Reserves are used by insurance companies when calculating the value of a loss portfolio transfer.
• Insurance companies use reserves to determine collateral requirements when there are insurance policies where the insured takes some of the risk.
• Reserves are used by claims management to help identify and focus on expensive or problematic claims.
• To manage and understand the financial exposures of a claim 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.

Reserving Axioms

• An ideal reserving process accurately reflects the outstanding exposures.
• Every open file is not accurately reserved.
• No clam is accurately reserved until it is permanently closed.
• Every file contributes to the “salvage” calculation when closed.
• A good reserving process helps identify problematic claims within a few weeks/months of the date of injury.
• IBNR includes natural reserve loss development on open claims and increased cost for re-opening closed claims. It is also the expense of claims which have not been reported or are reported years after the injury.
• Claims examiner’s file handling skills are reflected in their reserving pattern.
• The skill of the claim’s supervisor will directly impact the reserving pattern of their examiners.
• An examiner reserving pattern can be negatively impacted by the reserving authority (or lack thereof) given to the examiner.
• Reserving authority and settlement authority are not the same thing.
• Employers believe that claims examiners will settle the claims for a lower cost if the reserves are kept down. This is a myth that hinders good claims administration.
• If a book of claims is “accurately reserved” (and has a steady exposure), then the “salvage” 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. The quest should be for consistency in reserving, not necessarily “accuracy.”
• Catastrophic injuries have their own reserving and authority process. Life company impairment tables are an essential part of reserving catastrophic claims.
• Future medical claims are rarely reserved with a calculation that includes an appropriate or accurate medical inflation rate. Therefore, even future medical claims should be re-reserved once a year. The workers’ compensation medical inflation rate differs from group health medical inflation.
• 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 in the claims system.
• The bottom 51% of the claims account for 1% of the loss, and the top 3% of the claims account for 60%.
• Some claims administration systems automatically add reserves to the closed files if a bill is paid on the locked file. Other systems require re-opening the file and re-setting the reserves before a bill can be paid on a closed file.
• Most claims systems reserving processes require individual reserves on each “line,” such as Med, TD, PD, and Legal. The more sophisticated claims systems break medicine into smaller components, such as surgery, physical therapy, and transportation. It is possible to be over-reserved on one of these line items and under-reserved on another.
• One benefit from examiners authorizing the payment of bills is that they have a better understanding of the costs for medical treatment and are usually better at reserving accurately. The corollary to having the examiners authorize medical payments is that most examiners are not medical experts; asking them to authorize medical treatments or medical bills is a waste of time, results in no increased controls over the administration of the claim, delay the appropriate payments to our preferred vendors and results in no identification of fraud or savings.
• There is a financial incentive for employers and brokers to encourage claims examiners to under-reserve the case files. This can artificially result in lower x-mods for some insureds.
• Artificial pressure from employers and brokers to under reserve claims has the following impacts:
  • It increases the difficulty of 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 harms the relationship between the broker and the claims department, resulting in impaired communication.

Managing Reserves

Reviewing the monthly claims reserving report is useful when managing a claim office. This report provides the number of reserve changes and the total amount of reserves made by a claims adjuster. Good claims adjusters usually have a lower frequency of reserve changes than less experienced claims examiners. This is because they are generally more accurate with their initial evaluations and with the interim reserve changes. Claims examiners who have many reserve changes with small dollars are doing “stair step” reserving. They are churning their clams and are not accurately identifying the exposures.