Workers Comp Reserve Redundancy – Industry Health Measure + Bane of Claims Staff
What is a Workers Comp Reserve Redundancy? Why does it keep Claims VPs up at night?
Workers Comp Reserve Redundancy Definition
Reserve Redundancy can be thought of as two-sided. On a micro-level, an aggressive reserve by an adjuster would be lower than industry norms. A conservative reserve would be considered higher than industry norms.
Workers Comp reserve redundancies are generated by overly conservative adjusters. Deficiencies come from being too aggressive. Yes, the fine line of being over or under-reserved creates a built-in conundrum for any adjuster, not just Workers’ Compensation. (Bad)
Reserve redundancy is not just Workers’ Comp based – any reserve settings in the property and casualty insurance sector generates possible deficiencies or redundancies.
My Experience With Workers Comp Reserve Redundancy
The reserve redundancy rates were published on my claims listings as an adjuster, supervisor, and VP. See the last two paragraphs below for the ugly part of reserve redundancies/deficiencies.
Adjuster – claims listing had a ratio of reserve redundancy – so when a claim was handled assertively and correctly, then the redundancy rate was higher. One of my fellow adjusters remarked – so should we always settle for the outstanding reserves to make the redundancy rate decrease? He/she was trying to say that a well-handled file may generate a redundancy.
Supervisor/Manager – claims listing for the adjusters that worked with me had a number only – reserve redundancy rate.
VP/Director – I would receive a number that was like a credit score – reserve redundancy rate. Luckily, the redundancy rate was always 10 – 15% – which was good according to the consulting actuary.
The fine line between reserve deficiency and inadequacy is what may keep claim VPs up at night.
Redundancy From NCCI Presentation
Last week I wrote an article on the NCCI 2021 Yearly State of the Line Presentations. The presentations were very polished and professional.
Donna Glenn (Chief Actuary) included a slide that mentioned the Workers Comp industry is healthy even with the pandemic as the Combined Ratio was .87. The Combined Ratio has been hovering in that area for many years. If you do any work with Workers Comp, I highly recommend you check out their State of the Line from last week – worth it.
The part of her presentation that threw me for a loop was when in her first slide, she mentioned reserve redundancy ($14 billion) as an industry health measure. If you want to see the summary of the statistics, check out this page.
From the Summary- (Good)
- Reserves—The reserve position for private insurers remains strong, growing to a redundancy of $14 billion as of Year-End 2020.
Confused? If so, then check out this Motley Fool article on comparing loss reserving to doing shots of tequila.
From that article – leaving out the tequila comparison – it is a great comical read if you have the time
Over-reserving = insurers who are overly conservative may allot too much of their capital to reserves and be underleveraged, depressing their investment income.
Under-reserving = insurers who are too aggressive with their loss reserves may find that, later on down the road, they have to recognize losses and may even become insolvent.
In the 1980s I was working in a claims department where the reserves were all increased by 15% on each claim to increase a reserve deficiency to at least a neutral redundancy. (Ugly) Explaining the reserve increases on loss runs to insureds was not a good situation. In fact, the day the claims department shut down to increase each reserve manually by 15% was called the Monday of Doom.
The fine line of workers comp reserve redundancy comes in many forms. I hope these examples provided a good explanation of them.