Stairstepping Reserves Never Good For Workers Comp
The two-edged sword of Stairstepping reserves can be one of the most damaging developments to E-Mods or even worse for self-insureds/large deductible plans.
The basic Workers Comp claims formula is Total Incurred = Paid + Outstanding Reserves. The Total Incurred figure is what is charged against an employer’s E-Mod (X-mod).
Stairstepped reserves occur when a claims staff – in particular, Workers Comp – decides to increase the reserves on a file just enough to cover making certain payments. Independent file reviews will usually uncover this situation immediately.
The adjuster is usually locked out from making any payments until the reserves are adequate to at least make the payment. The adjuster will increase the file just enough to make a payment. This type of reserve-bumping is OK on a very limited basis. Why should a medical provider or an injured employee wait to receive a payment until an internal Workers Comp claims staff function is finished?
This type of reserve increase would seem as if the insured employer would benefit. This is not necessarily true. The self-insured employer or self-insured fund is also severely impacted by stair-stepping.
In self-insured, large deductible, or regular Workers Comp coverage, each type of insured is affected as follows:
Self Insured/Large Deductible
The TPA is responsible for handling the file and setting the reserves. There is a very high level of fiduciary responsibility as the TPA is spending directly out of a budgeted account.
If the self-insured employer is budgeting for the next year, they will have a serious shortfall as they believe the reserves used for budgeting are adequate. Stair-stepped reserves will always be inadequate as they are basically budgeted for tomorrow only.
The self-insured employer then runs out of budgeted WC funds halfway through the year. If the budget allows for no or little wiggle room the self-insured employer will have to find the funds somewhere such as layoffs, borrowing, or cutting back elsewhere.
The self-insured employer will sometimes have to convert to a regular insurance policy if the shortfall is severe enough and then possibly use a payment plan. This happens more than realized each year.
The other two parties harmed in stair-stepping reserves go unmentioned very often.
Stairstepping Reserves = Multiple Bad Effects
The two-edged sword of Stairstepping reserves for self-insureds and large deductible programs can have a dire effect. As defined earlier, stair-stepping is when an adjuster or member of a claims staff increases the reserves (Total Incurred = Paid + Reserves) just enough to make that day or week’s payments.
The other two parties harmed by stairstepping reserves are:
Regular First Dollar Insureds
If a Workers Comp adjuster or a member of a claims staff increases the reserves just enough to make payments, then it would seem that this would be less harmful to an insured than setting larger reserves.
The Total Incurred is the amount reported to NCCI or the Rating Bureaus each year. When reserves are stair-stepped the insured employer thinks the reserves are adequate. Sooner or later, the adjuster’s authority level runs out, and the file reserves must be increased sharply.
The employer’s E-Mod takes a drubbing as a very large reserve increase happens out of nowhere. With the looming changes by NCCI and most rating bureaus, these post-stair stepped reserves can result in an E-Mod jumping by a large percentage.
Stairstepping the reserves could help the Mod in the short term. In the long term, the piper has to be paid at some time. The E-Mod (X-Mod) systems and actuarial systems are built around accurate and timely reserving.
This is a term called IBNR (Incurred But Not Reported) that all rating bureaus and actuaries build into their estimates for Workers Comp insurance payouts. The IBNR does not take into account any stair-stepping.
Mod systems are known for catching up to any type of aberrant reserves. The catch-up mechanism is a very sharp Mod increase that an insured employer may not have budgeted due to stairstepping.
The under-the-radar parties that can be heavily are ironically the claims staff’s or adjuster’s employer. There have been many instances of self-insured funds closing down due to inadequate reserves. Stair-stepping will always add to and accelerate this type of problem.
TPA’s can easily lose clients if their adjusters are not adding in timely and adequate reserves. A self-insured employer turns over a very important fiduciary duty to the TPA which spends money directly out of an account.
Inadequate reserves will cause an employer to shop around for a new TPA. The TPA’s integrity will be lost when its client realizes the reserves on quite a few claims have been stair-stepped. The employer has not budgeted for future payouts properly.
The same can be said for insurance carriers. Their clients cannot trust them to make the proper decisions on a file when the reserve histories show that reserves have been properly input for their claims. A carrier cannot stay in business very long with inadequate reserving by their adjusting staff.
The old “pay me now or pay me later” rule would apply. Should reserves never be stair-stepped? As pointed out in the previous post, an injured worker should not have to wait on a weekly check or medical bill being paid at the sacrifice of an internal claims process.
Stair-stepped reserves can be seen very easily by the trained eye of an independent reviewer.
Related: What Does Stair Step Reserving Mean?
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