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.
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:
§ 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
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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