In my last post, I noted the term stair-stepping. This can ruin any Workers Comp budget for a regular or self insured in Workers Compensation. Stair stepping is the total failure of a claims department and their administration – in other words NO EXCUSES.
My definition of stair-stepping is the Workers Comp adjuster increasing the reserves just enough to make a payment. This grave adjuster mistake consists of a series of increases in the reserves to cover payments beyond just once. The pattern drawn on a graph would look like stair steps.
The workers comp claims adjuster cannot always be blamed in the instance. The adjuster may be attempting to cover a TTD payment while waiting on a supervisor or manager to approve their recommended Workers Comp increase. As I stated earlier, it is a failure of the whole Workers Compensation claims department.
The supervisor can easily detect an adjuster that is stair-stepping your reserves. Some Workers Comp claims systems have a built in module that will detect and flag this type of mistake.
I recently posted a few times on the medical only problems within some claim departments. Stair-stepping would be seen as part of the problem. We have seen stair steps in our claims review on medical only claims that inadvertently hid a much worse condition.
The Harmful Effect
Reserve Stair Stepping skews ar WC budget.What happens when your Workers Compensation claims department increases reserves just enough to make a payment? The results can be tragic.
The bottom line to stair stepping is that your Workers Comp reserves are being increased at the same rate as the paid figure in the formula Total Incurred = Paid + Reserves.
The basic function of the Reserve figure is at that point in time, what is the valuation of all future payouts until the claim is closed? If claim reserves are increased just enough to make payments, then the formula would be Total Incurred = Paid.
Total Incurred = Paid is exact for closed claims, not open ones. As a self insured, the Reserve figure can ruin your cost projections to your Board of Directors, especially if you are budgeting as a governmental entity. What happens if you project a budget for Workers Comp claims of $2.6 million when it should have been $4.4 million?
I always like to draw a comparison between credit cards and Workers Comp insurance reserves. Stair stepping is no more than the credit card issuer that will increase your credit limit each time you max out your credit card.
The small increases would not seem that bad until what you thought was $10,000 in credit card charges is now $25,000 without really noticing it. There were a few, now defunct, credit card issuers that would increase the credit limit slightly without the customer’s knowledge. This led to bankruptcy for more than a few individuals.
Stair stepping reserves is no different. If the credit card company would have increased the credit limit from $10,000 to $25,000 all at once that would have been noticeable. This is the same for your Workers Comp reserves.
Spotting this claims staff mistake is very easy if you have online access. If the reserves are very low over a few months on a newer large claim, that is a possible stair step. Paper loss runs are not that adequate for detection.
If you receive loss runs quarterly on paper, you may find that it is too late to do anything about the stair-stepped claim.
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)
Bloomberg Business News
Risk & Insurance Magazine
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