Workers Comp Reserving Is An Art
Should Workers Comp reserving be compared to a Picasso? One of the most difficult tasks that Workers Comp adjusters face (especially inexperienced ones) is setting the reserves on a file. A large number of people seem to think the reserves are just automatically calculated and this is the way that reserves are set on a claim.
The first time I had come across this was examining a loss run from one of the state funds quite a few years ago. The adjuster had responded to an email saying they did not necessarily agree with the reserves, but they did not want to change them as the unnamed system had set the reserves.
The file, at the time, was horribly over-reserved as the medical circumstances had changed dramatically. The file was going to really affect the insureds E-Mod/X-Mod. I had to actually talk to a VP-level employee of the fund to have the reserves reduced even though the file was obviously top-heavy on reserves.
I should take a step back. The reserves in the file are Total Incurred = Paid + Reserves. The total incurred figure is what the insurance carrier will report to the rating bureau or NCCI. That is why reserves are so important. Reserves are the outstanding funds that are charged to the employer’s E-Mod/X-Mod beyond what has been paid.
In the previous example, the Workers Comp system sat the reserves with little input from the adjuster. This can cause great complications as each injured worker will heal differently. Each employer will have a different set of return to work values – not all employers have light duty programs.
As any experienced Workers Comp adjuster will attest, the numbers of years of experience adjusting in a certain territory, state, or with certain employers will result in the most accurate reserves. There is no substitute for experience in this area, no matter how great of a WC computer system is in place.
Adjusters have a great balancing act that is performed with reserves on a daily basis. If the reserves are too high, the employer could be overcharged for funds that were never actually used to pay benefits. If the reserves are too low, the carrier, and in turn the employer has to adjust for large unexpected reserve increases.
That is exactly why reserving is an art, not a science. Applying some multi-variable statistical function to a claim is never going to result in the claim having the proper reserves. The statistical generator may be good in the short term, but usually is not that accurate in the long term.
An experienced WC adjuster should be able to override any reserve that is within their authority levels. Let the artist paint on their canvas. If there is a stat package that is calculating the reserve, then an adjuster should be able to make the reserves fit the file.
Why did I write this article? We just received in a loss run from a statistical generator-type reserving system. The reserves are not even in the ballpark.
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