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Outstanding Reserves Are Key to Comp Cost Reduction

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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.

Picture of Key hole Outstanding Reserves With Grass
(c) 123rf.com

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!!

 

Picture of Auditing Outstanding Reserves Concept
123RF

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

If you do not know the date your E-mod will be calculated, email or call me at [email protected] and we will find it for you.

 

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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James Moore

Raleigh, NC, United States

About The Author...

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