Workers Comp Loss Runs – Outlier Claims Skew Everything
Outlier claims are the ones that do not fit the norm. Outlier claims data are usually the easiest to spot by just examining the Total Incurred or Reserves in a loss run. The basic claim formula is Total Incurred = Paid + Reserves.
The amount paid on a claim can also be an outlier. For instance, a knee strain with no surgery has a $14,500 medical bill paid on the claim. The payment is an obvious outlier that deserves a quick investigation. These outliers are very easy to spot.
The reserves on a claim usually receive much more scrutiny. How can someone know whether the reserves are out of the ordinary? Reserving is more of an art than science. Reserves are the toughest outliers to spot as they are basically an opinion.
Three Workers Comp adjusters can actually come up with three very different reserve levels for a specific claim. Each adjuster can have a very unique opinion on the same Workers Comp file. The varying opinions are why a reserving expert is best to analyze the reserves. Attempting to negotiate reserves without having a reserving background can sometimes backfire.
In most cases, the outlier will be an amount that exceeds a certain normal value. There are also outliers that are also lower than the norm. The low outliers can ruin a self insured or large deductible program. If an injured employee is preparing to have knee surgery, insufficient reserves can result in the employer not budgeting enough $$ for their claims outlays for the next few years. Which sleeping dogs does one let lie?
Most self insured companies have a Loss Development Factor (LDF). If your self insured company is not having one calculated, you may not be budgeting properly for your WC claims. The LDF that is based on anemically low reserves is just that – anemic.
A reserve shortage on claims has caused many self insured employer groups to fail. Chronically low outlier reserves are a recipe for disaster. Surprise reserve increases usually cause a self insured group to have not assessed their members enough to cover the future payments.
The easiest way to find these high or low outliers is by downloading or converting the data into a spreadsheet. There are many statistical packages such as the Statistics Package in Excel. If your TPA or insurance carrier does not allow downloads of the claims data, you will unfortunately have to input it claim by claim. Having access to the reserve data online is priceless for your outlier hunt. This is especially true if your company has a large loss run.
The one reserve analysis technique to NOT use is to call your adjuster or agent and complain that your company is paying too much in premium and you need all the reserves lowered. This technique is never recommended at any time in claims analysis process.
Such banter with an adjuster can create a bad working relationship with your adjuster – the person with the finger on the button.
Related: What Does Stair Step Reserving Mean?
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