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Captive Reserve Question From Our Readers – How To Calculate Mod

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Captive Reserve Question Concerning LDF’s

A good question about Captive reserve from readers. I am responding to a question from Wayne on this post. I will paraphrase the question. How do I calculate the reserves required if I have had a workers comp captive since 2005? This is a very good question.

Picture of Open Book with Question Mark Captive Reserve LDF
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 The easiest way to calculate the reserves required is by calculating a Loss Development Factor. The definition of an LDF is here along with my last article on LDF’s. There are two schools of thought – one that says use the triangulation method and my school of thought that says use the triangulation method and a regression model.

 The LDF will analyze the reserves and especially the IBNR (Incurred But Not Reported) part of your required reserves. We often calculate hybrid LDF’s for our clients. LDF’s are usually based on the claims experience you will have for the next 10 years. It is not the most accurate statistic, but it is what you have to work with in reference to Captive Workers Compensation claims.

Graphics Of Central Processing Unit Captive Reserve With Software Icon
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 ONE DANGER on using software to calculate LDF’s is that data cannot just be plugged into the LDF software and then have the numbers produced in a report. The data has to be extrapolated and altered to make all of the claim data fit into the LDF formula. We do LDF’s very often. LDF’s are very often calculated by actuaries.

 As with most things involving Workers Compensation, the LDF is not necessarily a 100% accurate projection. It is not the same as an E-Mod, even though some of the conclusions are the same as LDF’s.

Captives can be great risk management tools in cutting Workers Comp costs. Projecting your company’s upcoming claim payouts is beyond critical.

We will soon open up a website called Synthnods where you can calculate an E-Mod or X-Mod to simulate what your risk factor is if you had a regular voluntary workers compensation policy.  

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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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