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Workers Comp Reserve Redundancy – The Good, Bad, and Ugly

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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?

pic of insomniac workers comp reserve redundancy worry
(c) Public Use – myupchar.com

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.

 

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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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