J&L Risk Management Consultants
Work Comp expert witness reserve reviews premium audits for employers
The term bulk reserves are one of the antiquated terms in insurance. An accumulated amount determined to provide for future loss of payments for known claims. These include case reserve inadequacies, additional case reserves, and claims that may reopen or other reserves not allocated to specific claims. IBNR would be part of the bulk reserves.
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A long standing debate has been occurring between myself and actuaries over whether or not that Regression Analysis is the best predictor for setting future reserves. Actuaries will usually say Regression does not give enough credence to the recent development of claims. I say that history repeats itself even if over a long period of time.
Regression (also called the Sum of Least Squares Method) uses a known independent variable such as an employer’s E-Mod to forecast a dependent variable such as future E-mods. I use Regression very often when predicting any insurance variable over the long term. Most spreadsheet software has regression analysis built into it such as Microsoft Excel(R).
If x is the independent variable, y is the dependent variable, m is the slope of the regression, and b is the y intercept – the basic equation is y=mx+b. There are many other types of regression such as stepwise, multiple, etc.
Excel(r) provides a number of regression analysis packages including my favorite the regression graphs for prediction. You can quickly create a great regression analysis chart for presentations.
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The length of time that closed Workers Compensation claims file material should be retained by the insurance carrier, employer, or TPA. Most states have a minimum records retention law such as seven years after the file is closed. I do not recommend ever destroying file material at any time.
There are a few instances of a State Supreme Court decision or new legislation being passed that changes the Workers Comp playing field. For instance, in North Carolina, all medical treatment cases were allowed to be reopened by the claimant. Employers, insurance carriers and TPA’s were scrambling to recreate the files that were older than 10 years. With the scanning capabilities of today’s computer systems, there is no need to destroy an insurance document of any type.
One can buy a scanner for little to nothing that scan thousands of pages an hour. Destroying the paper files may be applicable. Destroying the electronic copies really makes no sense with today’s technologies in place. You can store or backup hundreds of thousands of pages on a thumbdrive to enhance records retention.
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Most Captives for Workers Comp should not overlook the claims administrator which will handle your claims.
Over the last four years, captive insurance arrangements have become more prevalent in our business. That is not to say that captives have not existed in Workers Compensation markets for very long. I had come across them in the early 1990s. They were known as offshore insurance.
The company was a very large South Carolina lumber operation. They were moving their Workers Compensation from the carrier where I was adjusting claims, to this new kind of insurance. My question to them, as it is today – By, the way who will be handling your claims? I kept in contact with the insured to see how things were going and there were a few residual claims.
The lumber processing company had no answer to that question. I was told at the time – and I still hear the same thing today – That is not a major concern.
Without covering the operations of a captive, I wanted to issue one caveat. You are now more like a self-insured. The claims adjusting company is really spending right out of your bank account. The quality of the claims adjusting company should be a major consideration.
Why I pointed out the South Carolina lumber company is that over the next year when I had to contact them on a few claims issues, they would vehemently complain about the claims adjusting.
Injured employees were not getting paid, and medical providers were lighting up the switchboard with calls on very late bills. The lumber company was paying fines and fees due to late payments. Even the attorneys that represented the Workers Comp claims adjusting company were being paid very late.
The bottom line is that captives are just about the last forefront for smaller employers to be able to cut Workers Comp costs. I think there will be an explosion of captive insurance over the next 20 years unless the IRS creates rules that may affect their operation.
However, investigating who will be handling your captive Workers Comp claims will become even more critical. Asking that one question will save many headaches and time later as there is claims development.
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Earned surplus for Workers Compensation insurance carriers, mutuals, captives, self-insureds, risk retention groups and captives, comes from the basic formula Assets = Liabilities + Capital. Once all claims and expenses are paid (liabilities) then the surplus can be paid out to shareholders as dividends. The Board of Directors may make a decision to retain the surplus and add it to each side of the accounting equation (Increase assets and capital). There are many state and federal laws on how this surplus should be handled.
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The Workers Comp policy allows an employer to review files or perform claims audits. I have recently received a large number of questions on the employers wish to do a Workers Comp claims file review. The carrier or TPA was less than enthusiastic or not agreeable to having a review of how the claims adjuster handled the files, especially the reserves.
If the TPA or insurance carrier will not agree to a claims file review, the workers comp policy will be the deciding factor. If Workers Comp policy gives the employer the right to inspect the way their files were adjusted, then the TPA or carrier should comply. There may be outstanding reasons such as non-payment of undisputed premium or fees that could possibly void the right to review the Workers Comp files.
The best way to avoid any confusion or strife is to discuss file reviews BEFORE the Workers Comp policy or TPA agreement is finalized. If an RFP was the basis for the TPA contract or workers comp policy, the subject of the right to data and files should be covered very specifically.
We have never experienced the carrier or TPA not allowing access to their files. Some would not allow access to the reserving part of the file notes, for some reason.
As I have posted very often in this blog- having access to the electronic file can save a large amount of funds and time. Reviewing files at the carrier’s or TPA’s office(s) can be much more expensive than reviewing the files off site.
Please note that when TPA’s are mentioned, the workers comp policy may also be referred to as a Third Party administrator agreement. The TPA agreement may be used for reference on a Workers Comp claim file audit.
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This is also referred to as the ARD. In the experience rating process, the anniversary rating date is normally the effective date of the policy. This is not to be confused with the date that the rating bureau actually produces an E-Mod/Ex-Mod/X-Mod. The rating bureaus calculate the E-Mod approximately 90 – 120 days before the ARD.
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Workers Comp policy acquisition costs (in most states) are broken down into four areas:
Agent Commissions
They are considered as pro-rata on the current and future company balance sheets centered around the anticipated investment income. This is the same as a person or business writing off their expenses on their taxes that resulted in associated income.
If the costs cannot be recovered, they are written off as noncollectable if there is not enough income to cover the expenses.
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Protects a cedent against an aggregate amount of claims over a period, in excess of a specified percentage of the earned premium income. Stop loss reinsurance:
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The Loss Adjustment expenses (ALAE) can be allocated to the adjustment of a certain claim. Often, you will see this on Workers Compensation claims in the Expense Total Incurred figure. There has been much debate concerning what to include in the ALAE figure. Attorneys, PI’s, and expert witnesses can all be attributed to ALAE.
The one area that is so confusing is the rehabilitation nurses. Some carriers and TPA’s include their expenses as ALAE. Others include it as medical expenses.
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WALSH is best test for multi-jurisdictions of workers comp. I have posted on this subject in the past. I thought it would be good to revisit the subject after I read about a Tennessee employer that tried to have North Carolina apply Tennessee subrogation laws.
The WALSH Test is still the tried-and-true way to decide which jurisdiction’s laws would apply in the case of – for example – a truck driver who was injured in Arizona, whose home was in Iowa.
I have seen the WALSH Test applied to a case by a Workers Compensation judge many years ago. One of the carriers that trained me was where I became familiar with the test. As a claims adjuster of long ago, I handled many claims that involved injured workers which lived in one state and worked in another.
OK, so let us look at the truck driver. The implied caveat is that I know each state has its own laws on multi-jurisdictions. OK, so here is the test –
Worked – what state did the employee work the most in overall?
Accident – place of accident?
Lived – where is their home?
Salaried – where is the employee paid from each time?
Hired – where was the contract of hire initiated?
Transportation workers such as long-haul truck drivers are usually the toughest cases to make a determination. Using the trucker example:
Worked – multi-state (not a determining factor)
Accident – Arizona
Lived – Iowa
Salaried – Paid out of Texas
Hired – Oklahoma
Would anyone like to take a guess and email me at [email protected] or leave a comment? I will give my opinion next week.
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We often calculate Test Mods for employers of all types so that they can properly budget for their next few years Workers Comp expenditures. There are many software packages that will calculate them such as ModMaster.
There is an infinite number of combinations of variables in calculating Test Mods. You can change the year of the claim, amount of the claim, states in which you do business, payroll, etc.
The test mods are just that – an educated guess at what your E-Mod/X-mod/Ex-Mod will be for usually the next policy year. They are not usually calculated by the NCCI or your state’s rating bureau.
This area requires the correct inputs and forecasts to make sure your company budgets properly. I recommend using an expert to help you in this area. ModMaster costs less for multiple Test Mods than any other source. If any consultant or agent provides you with one, please remember to look at the numbers closely. Ask many questions. Make sure you understand the numbers and what they mean to your organization.
As with any Workers Comp statistic, check out the numbers behind the Test Mod.
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One way to pay more for WC claims is not Reporting Claims to your insurance carrier. The second part of the title is from the Fram Filter commercials. I had come up with four areas, which I have posted to blogs and our website often, on the Four (Now Five) Keys To Cutting Your Workers Compensation Costs.
When an employer delays or avoids reporting their First Reports of Injury (FROI), that employer will pay an extra 400% on their Workers Comp premiums. I performed two massive data studies using anonymous public Workers Comp data 10 years ago and then again two years ago. One of the hallmarks is that medical only and small lost time claims festering (a term I coined) costs employers big $$$.
If claims go unreported or delayed:
• Proper investigation by insurance staff cannot be completed
• Medical control is compromised
• Access to medical and other documents can be hampered
• Medical bills not process for fee schedule and PPO reductions
• Injured workers’ questions not answered, feel like they are in limbo
• Higher amount of attorney involvement
• Fines and penalties possible
• Time limit on certain defenses tolled
I could go on with the list, however I think you see my point. J&L is dedicated to saving employers Workers Comp premium by using time-tested techniques. Not involving your carrier or TPA is not a Risk Management cost savings technique. It may work well in the short term, but not in the long term.
One of my PowerPoint slides says All Claims Are Set in Stone after 48 hours. I will cover that point next time. If you wish to receive our newsletter, which is a summary of the blog, sign up for our weekly email. The signup box is down the right side of the page.
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States without a Workers Compensation medical fee schedule become more rare every year.
At last count, there are approximately 42 states with fee schedules. They basically allow a maximum charge for a medical provider (physician, hospital, physical therapist, etc.) per CPT code. The CPT codes became much more complicated with the ICD 10 code arrival.
The medical provider can charge much more than the fee schedule. The charge will be cut to the schedule unless there are extenuating circumstances.
In some states, a BR or by report is added to the CPT code to let the insurance carrier and the Industrial Commission know that their bill needs to be reviewed individually and not just cut to fee schedule. I often see BR CPT codes coming from university-based medical providers such as Duke University Medical Systems.
The BR does not denote a medical provider overcharging for their services. The medical provider feels the fee schedule amount of the CPT codes does not represent the fees charged if the carrier/TPA uses the standard schedule.
Update – the ICD10 codes have been released in 2013. These codes may end up changing some of the workers comp procedure codes in the very near future.
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The Three Associate in Risk Management courses is listed below.
This is a professional designation that I possess. It is awarded by the Insurance Institute of America (IIA). There are three somewhat difficult tests that need to be passed to complete the designation. I was able to complete mine in 18 months. According to the AICPCU – the three courses contain the following educational goals:
ARM 54: Risk Assessment
ARM 55: Risk Control
ARM 56: Risk Financing
If you are considering becoming a Risk Manager or are now one, the ARM designation is almost becoming a standing requirement.
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The experience period is the time frame from which the Experience Modification Factor (Ex-Mod, or X-Mod, or E-Mod) is calculated.
The usual period is from the policies four years ago to two years ago. For instance if you have a policy that starts on 1/1/2010, your experience period would likely be 2006, 2007, and 2008. 2009 would not be included. The 2009 claims have not had enough development to use as an accurate basis.
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The CRM program is sponsored by the National Alliance for Insurance Education and research. From their website www.scic.com – The Certified Risk Manager International (CRM) designation demonstrates that you are knowledgeable in all areas of managing risks, hazards, and exposures.
The five courses provide you with an in-depth knowledge about today’s highest priorities – identifying, analyzing, controlling, financing, and administering operational risks – as well as political risks, catastrophic loss exposures, third-party exposures, fiduciary exposures, employee injury exposures, juridical risks, legal risks, and more – whether insurable or not. The skills you learn will make you more proactive and valuable to your organization in discovering how risks can interrupt the flow of earnings and how to protect against it.
The five CRM courses are:
Each course is 2-½ days of instruction, followed by an optional exam. Any eligible individual may attend classeswithout taking the examinations or working toward the designation.
CRM courses cover all areas of risk management and feature:
To Earn the Designation, You Must:
Take all five CRM courses and pass all five CRM exams within five calendar years after you complete your first CRM exam.
The requirement to finish the exams within a certain time period is different from most curricula.
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Your workers comp policy just renewed recently. This is a critical time in the cost cutting.
This can apply to all Workers Compensation policies. I am now mentioning it as most policies renew on January 1st. Now is the time to start working on cutting your Work Comp costs.
I have posted very often on when to start your company’s Workers Comp cost cutting by cutting your E-Mod. Attempting this just before your policy renews is a complete waste of time. Your policy renewal date has 0% to do with reducing your Workers Comp E-Mod or X-Mod (California).
There are two ways to look at the timing of your Workers Comp E-Mod. Six months before your policy ended, your Workers Comp E-Mod was already set in stone. The cost-cutting way to look at it is usually six months after your policy renews, your new E-Mod is set in stone for your next policy year with very few exceptions.
I have posted numerous articles on this in the blog. Feel free to use them as a guide for when to start your Workers Comp E-Mod reduction program. If your policy just renewed, the target date for beginning to look at loss runs is February 1st. Negotiating lower reserves on your files is a laborious process. An insurance carrier is not just going to reduce reserves because you called them on the phone.
This is my article on Workers Compensation Reserve Review Timing. It is timeless information. Knowing your policy renewal date is critical to understanding your policy’s E-Mod process.
Make sure that you know which files that may need reserve reductions. Having a claims department review the wrong claims for reserve reductions can actually cost your company in the long run. So, if your workers comp policy just renewed, now is the time to get to work to save WC $$$.
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The CMS runs FIO – should this be death of Workers Comp? OK, so the title is meant to catch your attention. The second part is actually a reality as of last week. The federalization of Workers Comp remains an issue.
Yes, the CMS – the government organization that will be warehousing all the Workers Comp data in 2011 now is over the office that can make rules that affect Workers Comp overnight. I warned about this development early in 2010 in this article and this article.
The Federalization of Workers Comp is yet becoming more of a reality. Will the Federal Insurance Office (FIO) use the Workers Compensation data they will be warehousing to make Federal rules on how Workers Comp functions along with other lines of insurance?
What does this mean for any one that is involved with Workers Compensation? I think the rules are changing slowly but surely. The changes will then accelerate over time. There was a great article recently written on Workers Comp becoming irrelevant. Check it out here.
In this context, one would have to think being extremely flexible is the key to remaining successful where there are changes to the Workers Compensation landscape. Areas such as general liability, subrogation, and other lines of insurance would be great to explore for expanding beyond Workers Comp.
The AIC, ARM, CPCU and other professional designations all provide great education into areas beyond Workers Comp. One area that is so misunderstood is subrogation. In our file and reserve reviews we often see Workers Compensation adjusters struggling with pursuing benefits from liable third parties. The claim adjusters, underwriters, and other insurance personnel were just not trained in this area.
Subrogation is not something you can teach in an in-house three hour conference. Pursuing funds from third parties requires a new diary system to track the recoveries of funds. I have seen very few Workers Comp insurance systems that aided in this area.
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A Return To Work Program (RTWP) is one of my Five Keys To Cutting Your Workers Compensation Costs. An RTWP program is a great long term risk management technique to reduce Workers Comp costs. The RTWP cuts the period of Temporary Total Disability (TTD) to a minimum. The main elements of a RTWP are:
An adjuster who usually spends 3.5 days or more on the road handling claims. Workers Comp claims department evolved in the 1980’s to all but eliminate this type of adjusting. Most companies now use telephone adjusters to handle Workers Comp claims. I think the cost benefit analysis would show that there is a cost justification for outside/on-the-road adjusting. I used to be an outside Workers Comp claims adjuster when I first started in insurance.
A Disclaimer flags an incomplete audit. An accountant or auditor’s statement which says the required audit was not complete. The statement may have been issued because the auditor has not received all the pertinent information to do all of the required audit work. Because the audit is not complete an opinion cannot be formed as to the accuracy of the audit outcome.
For Workers Compensation, this limitation applies to executive officers and classifications with notes that indicate payroll limitation. The payroll on which premium is based shall exclude that part of the employee’s average weekly pay in excess of the applicable weekly limitation. The employer must maintain books and records for payroll that exceeds the limitation. These records must also be separated by classification code.
Should the excess surcharges be returned to New York policyholders? I was reading this article in a few of the online insurance publications. Some of the posted replies asked if New York should have returned the premiums to the policyholders and not the state. If the employers overpaid, should the employers not be reimbursed?
Insurers To Pay New York $120M for Premium Overcharges
New York officials say four insurance groups have agreed to pay a total of about $120 million in excess workers’ compensation surcharges to the state.
The attorney general’s office says the companies collected too much in surcharges on premiums from policyholders after the state Workers’ Compensation Board in 2000 changed the way it calculates the annual fees it charges worker’s comp insurers, charges the insurers pass along to policyholders.
The four insurance groups are ACE, Zurich, Pennsylvania Manufacturers, and CNA, each a parent to a number of insurers operating in the state. The ACE companies will pay $70 million, Zurich $37.5 million, Pennsylvania Manufacturer $5.9 million and CNA $5.75 million.
Article posted in Insurance Journal on 1/4/11
A small Workers Compensation claim can grow to a large one in the blink of an eye.
The following was taken from a manual that I first wrote in 2000. It is timeless Workers Comp policy and claims info. Yes, this may not be accurate in all situations in all states. I am including it as a concept that “NO CLAIM IS SMALL“.
The next example shows a more severe example of how over-reserving can affect WC premiums. The claim was a severe left arm strain with a possible bone fracture. The adjuster originally reserved the file at $15,000, which was an easily justifiable amount at the start of the claim. However, the employee had just a few medical bills and only missed two weeks of work. The arm incurred no permanent damage and the employee had no problems returning to work.
The first $5,000 reserves of a claim are the primary loss part of the claim. A claim that is over-reserved in excess of $5,000 but has payouts less than $5,000 can cost your company more than it appears on paper.
You are not only paying premiums for the ratable excess part of the claim, but even a larger percentage on the amount of reserves that were under $5,000. A claim that was reserved for $15,000 will have an actual excess loss on the premiums of $10,000, however, the over-reserved primary $3,873 reserves (primary loss), will have a larger effect than the $10,000 of excess loss. In the example, the claim was initially reserved for $15,000 and was kept open for three years. The payouts were only $1,127.
The claim was over reserved $3,873 of primary reserves and $5,000 of excess reserves. The $3,873 of primary reserves resulted in an increase in premiums of 60% and the ratable excess resulted in an increase in premiums of only 23%. The .15 is a factor that is set by each state as the stabilizing value in case an employer has one large claim and no or few other claims.
(Please forgive the lack of clear columns. Our service seems to be having problems.)
Primary Loss $ 5,000
Excess Loss $10,000
Payments $ 1,127
Over Reserved Primary Loss
(Primary Loss-Total Payments) $ 3,873
Ratable Excess
(Actual Excess Loss *.15) $ 1,500
Total Loss for Premium Calculation $ 6,500
Payments ($ 1,127 / $ 6,500) 17%
Ratable Excess ($ 1,500 / $ 6,500) 23%
Over-Reserved Primary Loss ($ 3,873 / $ 6,500) 60%
Amazingly, $3,873 of the first $5,000 (primary loss) of a claim will cost more in premiums than the next $10,000! There is NO SUCH THING AS A SMALL CLAIM. We have worked on files with many employers that were not concerned about having one or few claims with low reserves. As you can see from this example, a few claims with lower reserves may raise premiums more than one very large claim. All claims affect your E-Mod from medical only to very large claims. I recommend that you review claims upon receipt of your loss runs.
Therefore, there is no such thing as a small workers compensation claim.
Taken from www.cutcompcosts.com/manuals.html “Keys To Cutting Workers Comp Costs – A View From A Claims Standpoint” by James J. Moore.