Lower Workers Comp Reserves Not Always Best
The workers comp insurer reserves sometimes hide a reserve deficit. AM Best released a report on May 2nd that was startling to me. Of the 11 insurance companies that failed, nine were due to inadequate reserves and pricing. The carriers were not necessarily Workers Compensation insurers.
Reserves that are too low on your Workers Comp claims can be as harmful to your Workers Comp budget as reserves that are too excessive. I have dedicated a portion of this blog on how to lower your company’s Workers Comp reserves.
As I have said very often in presentation, the Workers Comp claims adjuster walks a tightrope between excessive and deficient reserves. When I post about reserves, I am actually referring to (Total Incurred – Paid).
How do deficient reserves harm your Workers Comp budget? I will break it into two parts – regular Workers Comp policy and self insurance.
Regular Commercial Workers Compensation Policy – Avoiding a massive reserve bump
There is nothing wrong with making every effort possible to lower your workers compensation reserves with risk management techniques such as a return to work program, etc. Having deficient reserves on certain claims can cause a huge unexpected reserve increase. This can cause a very large increase in your E-Mod that your company was not expecting.
One of the main signs of this is a major claim where the outstanding reserves on your loss runs are approaching zero. For instance, if a claim has a back surgery pending and the reserves are very low, you can expect an increase in the reserves. Timely increases in reserves sometimes functions are a red flag that something major is going on in your Workers Compensation claims.
My advice is to never call or email your adjuster about having deficient reserves. I would just make sure that you have analyzed the reserves and are properly budgeted for an E-Mod increase. The timing of the reserve increases is very critical to your Workers Compensation budget
Self Insurance – critical
One of the main ways to wreck a self insurance program is with deficient reserves. I have also seen this when handling claims from a self insurance risk pool. This is one of the major misunderstandings by clients that we have assisted in becoming self insured.
Low reserves in a self insured or a large deductible will kill the program. If the reserves are deficient, then a self insured company may be under the impression that all is fine with their Workers Compensation budget.
With self insurance, the employer may not necessarily have an E-Mod, but you should have a LDF (Loss Development Factor) calculated each year for your program to assess its health. Most self insureds budget their Workers Compensation yearly.
If you are looking at your reserve figures from last year to set your budget, how much of an impact would 20% of your claims not being reserved for upcoming surgeries? You have budgeted for payouts of for instance $2.6 million and you actually have a hidden risk of another $900,000?
Having an outside consultant company such as ours – shameless plug – perform a statistical analysis of the reserves and claims would show the true amount you need to budget for your present and future claims.
The easiest way to spot the lower workers comp insurer reserves and deficiencies is to be very involved with your claims process. As I have said at least 20 times in this blog, having online access to you claims and claim reserve figures is golden. Quite a few carriers allow you to run ad-hoc reports, which is the best way to find the files with deficient reserves.
Both self insurance and regular commercial policies suffer heavily with the term – stair-stepping.
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