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Workers Compensation Claim Reserves – The Skinny


WC Claim Reserves Indemnity

From an article and a manual, I wrote many years ago. The main WC insurance variable this manual addresses is Claims Reserves (Reserves). THE MOST IMPORTANT THING TO REMEMBER IS THE CLAIMS RESERVES ARE THE UNREGULATED PART OF THE PREMIUM CALCULATION PROCESS. Insurers can set the level of reserves at whatever level they deem adequate with little input from you. A governing body regulates all the variables that go into the premium calculations except the claim reserves. Reserves are what the premiums are charged from, not the amount of money paid on a claim.

Graphic of shaking Hands One is Injured Claim Reserves Indemnity
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Now we come to the engine of this whole process. Everything we have talked about just now all centers around the loss data you have incurred over the last three years. HERE IS A VERY CRITICAL POINT. The loss reserves are not only what you have paid out, but also what the insurance adjuster thinks you will pay out over the life of the claim. Everything else in the WC insurance process usually has some type of standardization, but the amount of money that is reserved on a loss is a true GUESSTIMATE. It is the most subjective part of what you pay in premiums. The amount paid out on a claim has little to do with the premiums charged.

The reserves on a Workers’ Compensation (WC) file are not based on any statistical formula or guide. A claims adjuster sets the level of reserves using their own job experience as a basis for how much the expected payouts will be over the life of a claim. If the reserves exceed a certain authority level, the adjuster must have their supervisor or manager approve the reserves. Reserving is an art of sorts that is akin to valuing a house. As with valuing a house, there is a commonality on the cost of certain injuries. However, there are at least 100 variables that are unique to each WC claim’s value.

Reserving is not an exact science, and is the adjuster’s estimate of what the claim will cost in total.

The following items should be taken into consideration when estimating reserves:

Picture of Premium Concept Claim Reserves audit
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§ Nature and extent of the injury

§ Anticipated medical costs

§ Anticipated permanency rating/impairment

§ Amount of weekly wage and compensation rate

§ Attorney involvement

§ Claims history of the claimant

§ Claimant’s age

§ Claimant’s occupation

§ Claimant’s education level

§ Claimant’s work history – personnel issues

§ Availability of light or modified duty

§ State laws

Picture Of Two Jar With Dollar and Coins Claim Reserves Indemnity
(c) 123rf.com

There are usually three types of reserves on a specific WC file. They are Indemnity, Medical, and Expense. A WC file’s reserves are based on medical expenses; period of time an employee takes to heal; their motivation to return to work; and any permanent disability.

The Reserves on a file are the “engine” of the premium calculation process. The Reserves for the last three policy years are used to calculate the Experience Modification Factor (E-Mod). Promulgating an E-Mod is not the focus of this manual. This manual will cover some of the basic concepts of calculating an E-Mod.

The E-Mod individualizes the premium to a certain employer. The current WC systems charge all employers based on a classification code multiplied by the associated classification code’s remuneration (payroll / 100). The E-Mod attempts to make sure the safe employers are rewarded and the unsafe employers are penalized. While the E-Mod system has been heavily questioned, it is the system in place and no other system has been devised that is any more effective or efficient at charging an employer the correct premiums.

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management 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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