Term Of The Day – Stair Step Reserving
The stair step reserving of Workers Comp is an age-old concern of any party to an insurance or TPA policy. If loss reserves are raised by increments to cover the cost of claims expenses as they happen, the term stair stepping comes into use. If the claim reserves were to be charted, the resulting graph would look like stair steps. This can also be known as reserve creep.
The slang term amongst adjusters is reserving to pay bills or the next TTD payment.
Doing this to reserves is very harmful for many reasons:
- Affect insureds E-Mod negatively
- Self-insureds will not have an accurate Loss Development Factor (LDF)
- Self-insured clients will not budget properly for future payments
- Will cause actuarial or statistical work to have a built-in error
- Use up the adjuster’s time by constantly having to take time to increase reserves in the system
- Not giving reinsurers timely notice
Many years ago, some self-insureds wanted this practice in place to keep their Risk Factors low. This blew up in their face eventually as all files were reserved too low and did not reflect the risk of future payouts which is the underpinning for reserves.
Many Risk Management, insurance carrier, and TPA processing systems have a large amount of built-in redundancy to alert claim supervisors and managers to stair step reserving. When I perform loss run reviews, a reserve history chart will reveal this type of reserving in seconds.
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