A Small Workers Compensation Claim Is A Misnomer
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
(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 https://cutcompcosts.com/manuals.html “Keys To Cutting Workers Comp Costs – A View From A Claims Standpoint” by James J. Moore.