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How Do Reserves, Total Incurred, and Paid Affect Your Premiums

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The Total Incurred Formula Generates Premium Base

The total incurred formula involves three distinct terms.  

When I am making a presentation or when I receive email questions about my posts, one of the areas that is often mentioned is the formula on the parts of a Workers Compensation claim.

Vector art style of man on table with formula background Total Incurred Formula
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There are a few modifications or re-wordings by insurance carriers that change the variable names. The formula is : Paid + Outstanding Reserves = Total Incurred.

A quick definition for each of the three terms:

  • Paid – what has been paid to date on a claim. This does not include anything pending. This number is almost impossible to change as what has been paid on a claim cannot really be altered unless there was a mistake in a payment.
  • Outstanding Reserves – the projected payouts that have yet to be paid over the life of a Workers Comp claim. The adjuster uses a “rule of thumb” to set the reserves. The reserve figure is totally negotiable as there are no absolute formulas for estimating future payments. This is an opinion of the adjuster.
  • Total Incurred – The present and future total cost of a claim. This figure feeds into the Experience Modification (E-Mod) formula and can heavily affect your premium. The claims figures on your NCCI(r) or State Bureau come from this figure.

I often hear that only the Paid figure affects the E-Mod. This is not true. The total incurred is the amount that is the starting point for the E-Mod calculation. The most important factor is that the Total Incurred is charged to your E-Mod at least three or more times.

Graphic Total Incurred Concept
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I have posted many times on how to examine the claims reserves or total incurred. The easiest way to begin is to look at your loss runs. Knowing what to ask about each claim reserve is key. Online access to your claims is golden as you can track what is happening or if you hire an expert, it will save you a large amount of consultant $.

Have a great and safe Halloween.

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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