The Outstanding Reserves Are The Key
Outstanding reserves can make or break any company’s Workers Comp budget. I received two questions this week on the three parts of what is considered Total Incurred. Total Incurred is reported by your insurance carrier to the respective rating bureaus.
The basic formula is: Total Incurred = Paid + Outstanding Reserves.
There is little that you can do about what has already been paid on a claim. One of the best methods to cover what has been paid is to do a statistically sound claims performance audit. This type of audit basically puts the onus on the carrier to have handled the files properly and efficiently.
The main and negotiable part of the claim is the outstanding reserves. Outstanding reserves are the leftover forecasted funds by the claim adjuster or department. This is the amount of funds that is reserved for future expenditures.
What happens to the outstanding reserves when a claim is closed? They are zeroed out so that Total Incurred and Paid are the same. However, and this is the important point, if the date arrives for your Mod to be tabulated and there is an outstanding reserve on a file or group of files, YOU PAY FOR IT AS IF THE MONEY WAS ALREADY SPENT!!
That is why there are three very important numbers/dates to track:
- Outstanding reserves
- Total Incurred
- Date your E-Mod (X-Mod in CA) is calculated
Let me give you an example of what I call reserving budget rot. Your E-Mod (X-Mod) will be pegged on August 31, 2012 at close of business. That is what the insurance carrier will report t to the rating bureaus for your E-Mod (X-Mod). You have a file that was closed on September 3rd, 2012 that had an outstanding reserve of $134,000.
You call the insurance carrier and ask them to roll back the $134,000 of over-reserving to August 31st. That will not happen. Even if the reserves are removed or reduced the next biz day after your Total Incurred is recorded, you are stuck with the $134,000 on your E-Mod. That is the way the Workers Comp biz works. Carriers will never do this on purpose. It is just another function of the Workers Comp insurance process.
Knowing the three bullet points above is going to save you a ton of heartache at your renewal. Why did I write this post? We had a new client contact us earlier this week where the above example just happened with their E-Mod.
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