A Word About Workers Comp

Whether you call it Workman’s Compensation, Workmen’s Compensation, Workers’ Compensation, Work Comp, or Workers Comp, it is still the same, silent budget killer. Workers’ Compensation is one of the most complex and confusing components of your insurance budget.  

Premium audits, experience modification factors, classification codes, reserve reviews, and state regulations & statutes all add to the chaos. The question as to whether your company is being overcharged is not an easy one to answer. 

Only by working closely with your carrier, third party administrator (TPA)  or your insurance agent can the answer be found. Errors and overcharges occur in over 50% of all policies. 

Premium Audits

Workers Compensation premium audits occur yearly within 60 days after policy expiry.  The premium auditor will usually contact your company within 30 days after policy expiry to set up a premium audit appointment.   The premium audit letter you receive will have listed the specific items to be reviewed by the auditor.  

The premium audit is not the same as a tax audit but should be treated as such.  Organization is the key to any successful audit.  If your records are disorganized, this will reflect on your company overall.   After your premium audit is complete, you will receive a premium audit results along with a premium audit billing.  

If you do not understand or have questions on the audit results and the billing, you have the right to have all of your questions answered and to even to initiate a premium audit dispute if you do not agree with the results.

All of the procedures and rules for a premium audit or premium audit dispute are spelled out in your policy.  Time is of the essence in forwarding your dispute to the insurance carrier.  If you do not agree with your premium audit bill,  the worst mistake is to set on the bill and do nothing.  

Claim and Reserve Reviews

Many insureds have questions about how their claims were handled by the adjuster.  Often times, the adjuster has performed well.  However, there are instances where the claims adjuster did not do their job.  

One of the most common errors is to over-reserve the files.  An adjuster usually has to set an initial reserve at 14 days with a final reserve at 60 days after the claim was received by the carrier or Third Party Administrator.  The 14-day reserve usually occurs after benefits are paid or denied on the file. 

File performance audits and reserve reviews are part of our Workers Comp Risk Management services.  We provide a holistic view of the process from the time the claim is received until the last premium audit billing is published for that file.  We do not just do premium audits or reserve/performance audits.  

Our list of services covers what we do on a daily basis for employers. 

J&L Risk Management Consultants, Inc. has the experience and expertise to wade through all of the confusion and help your company reduce its insurance budget.  

We have had great success in the past auditing premiums, verifying e-mods & class codes, double checking rates, and helping employers resolve disputes with their carriers. Your money could be in the hands of your insurance carrier. Get workers comp advice now and get that cash back where it belongs.

Our Award-Winning Workers Comp Blog

One of the most useful aspects of our website is an informative blog. We have provided over 2,000 articles to our readers free of charge.  

J&L’s blog contains no advertising.  All the articles were written by our founder James J Moore, AIC, MBA, ChFC, ARM.  James’s articles appear in many worker’s compensation websites.  Over the years, many websites republished his articles.  

Publications such as WorkersCompensation.com, Work Comp Central, Work Comp Analysis, Bloomberg News, and Entrepreneur Magazine included various articles from the blog.  

James wrote all the articles except for a few who were added by our OSHA Consultant Glen.  A few guest authors provided very interesting posts.   Some of the other competing websites use paid ghostwriters to supply articles for their blog.  

The best way to find what you need is by using the search box on any page of the blog, except this landing page.  

The blog and website won many awards for being updated frequently and for the material presented to the readers. If you like an article, click on the category at the bottom of the article.  The category search provides many associated articles.  We revamped our article structure in early 2019.  

We currently are working on providing more accurate information on our metadescriptions.  Inaccurate metadescriptions have been the bane of many Google, Bing, and other search engine users.

Expert Witness Work

Our founder James J Moore remains of the pre-eminent workers’ compensation consultants on a national basis. 

Many attorneys, carriers, and employers have sought him out to provide expert witness reports; He has provided testimony for cases involving premium audit, ratings, workers compensation Experience Modification Factors, and claims handling.  

James recently presented at the AAIMCO annual conference on the subject of finding sources to use in an expert witness practice.  

James proffered his opinion in one of the largest class-action lawsuits in the southeastern US in 2013.  

Being an expert witness is a hard row to hoe.  Worker’s Comp remains one of the most individualized areas on which to provide an opinion.  Each state supplies its own rules.  

The National Council on Compensation Insurance (NCCI) and California’s Worker’s Compensation Insurance Rating Bureau (WCIRB) possess very different rules and regulations on how a company is to be rated.  Keeping up with all of these has proved a difficult but rewarding task.

Self Insurance

Self Insurance covers approximately 15% of the market for worker’s comp.  Self-insureds need to follow their claims much more closely than other types of insurance arrangements.  The claims adjusters spend directly from a self-insured employer’s budget.  

A self-insured employer needs to think of their carrier’s claim adjusters as an extension of the employer’s office.  Working directly with the claims staff usually results in the employer having a greater control over their finances.

Self-insureds do not have the buffer that the voluntary market insureds possess in their risk portfolios.   The Experience Modification System provides a buffer of sorts when voluntary market employers have a mega-claim.   The self-insured employer will face the mega-claim with only reinsurance as a backstop for their risk.
 

Voluntary market insureds benefit from a buffer if a spate of claims occurs during their policy year.  Self-insureds do not benefit from this insuring arrangement.  

Self-insureds face the brunt of their claims expenditures with purely an insurance budget.  Reinsurance removes some of the risk for a claim or a group of claims.  The group of claims reinsurance is called the aggregate limit.  Aggregate limits vary by each self-insured.  

Once the claims for a certain period reach this limit, the reinsurer steps in pays the claims from that point.  The usual single claim reinsurance level sits at $250,000.

Six Keys To Cutting Workers Comp Costs

Our founder James Moore speaks to many different groups on the Six Keys.  The keys have varied very little since the 1980s.  The first four keys originated in the late 1980s when James worked as a multi-state workers compensation adjuster.  

James added two additional keys in the last 20 years.  The last key – Adoption of the Keys by Management could have been included with the original four keys.  James realized that only a small percentage of employers used the keys to reduce their workers’ compensation expenditures.

James added the Sixth Key to round out what he noticed as the proper way to reduce workers compensation budgets and premium.  Without management’s involvement, the keys end up as dusty manuals on a shelf or an old computer file which had not been accessed for months or years.  

The Keys appeared first in one of two manuals that James offered for sale before the Internet and blogging became so popular.  Most of the Keys have been added into the blog over time.  If there was one task that employers needed to accomplish to cut comp costs, James added that key to the list.  

According to James, “The main overall key to saving on workers’ comp expenditures is just paying attention to the silent budget killer.”  James added that any employer that turns their attention to payments if self-insured and premiums for voluntary market insureds naturally sees their workers’ compensation budgets shrink over time. 

Claims Review

We recommend claims reviews every month using the loss runs.  Online access enhances any claim review.  The employer can review their claims without a formal claims meeting.  

Online access allows an insured employer to review their claims whenever they wish to assess their claims.  

One caveat from performing a claims review amounts to knowing which claims to pick and which ones to leave alone.  Calling attention to certain claims can hurt reserves.  

Setting reserves levels can be more of an art form than a routine task.   We reviewed many analytics software programs over the years.  Not one can accurately assess the level of reserves.  

Too many variables exist in a Workers; Compensation claim for analytics to work properly.  

Medical healing periods vary by each person.  No two injured workers heal the same way.  The healing time assessment requires the keen eye of an experienced adjuster.  

Adjusters by the nature of their job are very overloaded.  Adjusters maintain 13 tasks in their jobs.  Any assistance that an employer gives to an adjuster usually results in a lower claims reserve level.  

Claims reviews are not easy tasks to perform.  One of the keys to lower worker’s comp costs occurs when the employer takes the time to become interested in their claims.  

Subrogation

Subrogation remains one of the areas that confounds many Workers’ Compensation insurance adjusters.   A few decades ago, insurance adjusters covered many lines of insurance, including crop and life.  The insurance industry split the lines of insurance adjusting. Workers’ Comp became a specialized line of insurance.  

One of the areas for the change came about as insurance lines became much more specialized over time.   Many companies decided to self-insure their losses instead of paying premiums.  The change led to the Third Party Administrator (TPA) specialization.  

Subrogation can be defined as ;  the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by the transfer of any associated rights and duties.

Waivers of subrogation appear in almost all policies.   These waivers allow the carrier or self-insured to pursue any responsible third parties for any indemnity or medical expense on a WC claim.  These waivers put the responsibility directly on the claims adjuster’s shoulders to pursue the claim for benefits incurred by the insured or self-insured.  

Some collateral damage occurred when the lines of insurance became very specialized.  Our claim reviews show that pursuing the probable responsible third party created a lack of recovery on many files.   Adjusters sent letters sometimes, advising the third party insurance carrier of a possible lien.  

Often, the adjuster’s pursuit stopped at that point.  Monitoring the claims that had third party implications requires a diary of its own, and not in the regular claims diary.   

Tracking the issuance of the subrogation letter to having the funds (important) credited back to the file caused the need for the insured to create a subrogation diary.   Do not leave “money on the table.”  

Insurance carriers and TPAs credit the subrogation monies back to the file in different ways.   For self-insureds, the funds are true cash money.   Make any subrogation files part of your regular work diary if you are self-insured.   Having online access (which I have said is golden) allows an employer to see how the adjuster and possibly claims supervisor treat the subrogation claim.  

A regular voluntary market policy (usual coverage) also has an element that makes the tracking of any subrogation claims very important. 

 If your company has an E-Mod (sometimes call EMR, X-Mod), the recovered funds can be credited back to your Mod in most cases – except for the extra step of making sure your Workers’ Comp carrier credited the subrogation amounts back to the file which usually will lower your X-Mod.  

The reduction can be a significant saving or recovery for the next three to four years as the subrogation recovery works through the Mod system.  

J&L”s Risk Management Workers Comp Consultants

As Workers Comp Consultants, there are many areas of consulting in which we specialize for our clients.   Our premium reduction services center on specialized premium analysis. 

Premium Analysis Service 

We statistically analyze your premiums and NCCI / state bureau Experience Mod calculations for errors. We also thoroughly review the premium auditor’s computations to verify the accuracy of the yearly premium audit.

Reserve Analysis and Review

J&L’s workers comp consultants will examine your claims reserves to make sure they are in line with industry standards and that files are closed promptly.  

Experience Mod Projections

We often forecast employers’ Experience Mod for up to five years in the future.  We use the time-tested regression analysis methods instead of the usual actuarial projects that are in our opinion not as accurate as possible. 

Physical or Online File Reviews

We can easily review the claims adjuster’s work to ensure proper claims handling, reserving, and subrogation.  We usually score the adjuster’s work using a 100 point scale.  Our claims analyses covers 33 different areas of claims adjusting to thoroughly assess the health of the files. 

Presentation and Employer Training Services

We can provide an award winning workshop from one to four hours in length that is applicable to all states.   The workshops can be altered to the needs of a specific employer or group of employers.  

Self Insurance Services

We analyze your company’s current Workers’ Compensation insurance situation to see if self-insurance is a viable option.  We can help you design or modify your self-insurance program for maximum cost savings.  There are approximately 8 – 10 requirements of employers that wish to be self insured.  We have long term experience in assisting employers that wish to covert to self insurance.  

Self-Insurance Loss Development Factors

J&L will forecast your required spending levels for up to 10 years in the future using current and past data.  We have promulgated Loss Development Factors as part of our services since 1996.  Our company founder James J Moore has a large background in actuarial science.  He possesses a Bachelor’s Degree in Actuarial Science. 

Employer Support Services

We provide various employer ancillary services such as

• Accident Disaster Plans
• Medical Treatment Networks – this is a real cost saver that involves little monetary input 
• Return-to-Work Programs – to keep the files from becoming permanent total by successfully returning the injured worker to gainful employment 
• First Injury Reporting – a critical part of Workers Compensation savings is reporting an accident as soon as possible.  We will train the employer to how to properly and timely file a first report of injury.  

Expert Witness Services

Our founder has reviewed hundreds of files for employers, Third Party Administrators and carriers.  James has testified on numerous files that involve premium audits, premium billings, and adjuster file management.  He wrote a landmark report on a recent large class action matter which enabled the file to settle readily.  The class action employer members were able to recover overcharged premiums.  

James has a background that covers actuarial science, IT, claims, premium charges, and proper policy applications.   His background enables him to testify in various Workers Compensation matters.    

TABLE OF CONTENTS

These definitions are designed for use when dealing with any WC insurance personnel, especially when renewing your WC policies. 

Administrative Law Judge (ALJ): The legal representative employed by the Workers’ Compensation Board who reviews appealed administrative orders, holds impartial hearings, and issues legal opinions. Formerly called a hearings referee.

Affirmative Warranty:  A policy condition that is required to exist on the date the statement is made.  For example, the auto policy requires a statement that the insured has not had auto coverage canceled in the past three years.

Aggravation: A claim for aggravation is a worker’s request for additional disability compensation stemming from a worsening of previously accepted conditions.

Aggregate Excess Policy (stop-loss excess policy):  A type of policy that begins to pay losses, subject to its limit, when the insured’s total losses under the self-insured retention have exceeded a certain limit.  The aggregate excess will pay losses from the first dollar after this limit has been reached.  The self-insured retention applies to losses during a specific period of time, usually one year.

Aggregate Limit:  A maximum amount that the insurer will pay for all losses covered under a policy during the policy period.

Allocated loss adjustment expenses (ALAE):  Specific expenses incurred in the adjustment of claims and require a reserve on pending and IBNR claims.

A.L.E.: Allocated Loss Expenses, which are insurance company costs for adjusting and settling claims which can be identified with a specific claim. The A.L.E. are often included in the claims costs used to adjust premium in some loss-sensitive premiums adjustment types of WC policies, such as sliding scale dividend plans, or some Retro or Retention plans.

Alphabet House Organization:  A large intermediary firm with offices world wide:  due to its size, it can offer specialized departments, such as marine or aviation.

American Medical Association Guides: The most widely used methods of rating functional impairment. They are a system of rating anatomical impairments for injured workers.

Americans with Disabilities Act (ADA): The ADA is a federal civil rights law enacted in 1990 to protect individuals with disabilities from all types of discrimination, including that which is related to employment: recruiting, the hiring process, terms and conditions of employment, promotions, and training procedures.

Ancillary Care: Care such as physical or occupational therapy provided by a medical service provider other than the attending physician.

Annuity: A contract to make periodic payments to a person for a fixed period or for life.  A person usually purchases an annuity from a life insurance company by paying a premium.

ARAP: Assigned Risk Adjustment Program–An additional adjustment to the Experience Modification Factor, used in some states to adjust premium for Assigned Risk policies. Although NCCI includes this adjustment on all their Mod worksheets, not all states use the ARAP program. Illinois, for instance, charges higher rates for Assigned Risk policies, and thus does not use the ARAP adjustment to the Experience Mod.

Arbitration:  The process in which two or more parties agree to have an impartial person resolve a dispute.  This impartial person is called an arbitrator.  Arbitrators listen to the evidence in a case and decide the dispute on the merits of the evidence presented.

Assigned Risk Plan: Sometimes called the Pool, this is a mechanism established by individual states to make sure that employers can obtain WC insurance even if insurance companies are not willing to write such insurance on a voluntary basis. Assigned Risk plans in many states carry higher rates than the voluntary market.

Association Captive:  A form of group captive. A group captive insures the exposure of multiple parents that are usually from the same industry.   An association captive is sponsored by an association.

Association Cooperatives:  Groups of independent agents and brokers that have combined their talents and resources to compete more effectively against large brokerage firms in selling insurance.

Audited Premium: The final premium for the policy term, produced by auditing actual payroll exposures.

Audit Workpapers: Worksheet prepared by the premium auditor, can be either hand-written or computerized, showing how the auditor arrived at the payroll numbers that are used to determine the audited premium.

Average Value Method:  Requires estimates for loss reserves to be made on an aggregate basis for a group or category of claims.  This method is usually used to set a tempory average value for claims until more details can be obtained to make an individual case estimate.

B

Bailee’s Customer Insurance:  A form of inland marine insurance.  It provides coverage for loss of a customer’s goods in the custody of a bailee, and is applied regardless of fault.

Basic Premium:  A charge to cover the insurer’s acquisition expenses, administrative costs, profit, and the insurance transfer charge.

Basis Risk:  The risk that the amount an organization might receive to offset its losses might be greater or less than the amount of actual losses.

Basket Aggregate Retention:  An aggregate retention covering several types of risk exposures.

Board Certified: This is different than being licensed. In addition to licensing, some physicians may be board certified in their specialty after typically completing a period of training (“residency”) in a particular specialty and passing an examination given by the board of that specialty.

Book Value:  (of depreciable asset)  An asset’s historical value/cost, less accumulated depreciation.

Brother – Sister Relationship:  Relationship between one subsidiary and another of the same parent.

Business Risk:  The potential variation in revenues that can result from the nature of the product or service an organization provides.  For example, an increase in demand for a product will result in higher profits.

C

Captive Insurance Company:  A hybrid form of risk financing where a subsidiary is created to insure the risks of its parent and affiliated companies.

Case Reserves:  The estimated amounts that may be paid on losses that have been reported.

Catastrophe Bond:  Type of insurance linked security specifically designed to transfer insurable catastrophe risk to noninsurance investors.

Catastrophe Call Option Spread:  A call option spread based on the value of catastrophe losses.

Catastrophe Equity Put Option:  A right to sell stock at a predetermined price in the event of a catastrophe loss occurring to the organization.

Catastrophe Reinsurance:  A specialized form of excess of loss reinsurance, providing protection to an insurer for losses from a single catastrophic event that exceed a specific amount in total.

Catastrophic Case Management:  Identifies and monitors claims that are potentially long-term to prevent wasteful and unnecessary procedures.

Cede:  Transfer payments and losses to a reinsurer.

Ceding Commission:  Credited to the reinsured against the reinsurance premiums to reimburse the reinsured for its underwriting and issuing expenses.  The reinsurer does not have these initial expenses.

Ceding Company:   Purchases reinsurance and is an insurance company that transfers premiums and losses to the reinsurer.

Chronic Pain Syndrome: A subconscious psychological stress state prolonging pain through operate conditioning and pain behavior.

Claim: A written request for compensation from a subject worker, someone on the worker’s behalf, or any compensable injury of which a subject employer has notice or knowledge.

Claims Adjuster: Insurer representative who processes a claim filed by an injured worker. Also referred to as a claims examiner.

Claim Experience Report:  A report which reflects claim payments and receipts for claims closed or pending during a specific period.

Claims Made Basis (for allocating loss costs):  A measure of the value of allocable losses obtained by calculating the actual payments and additions to reserves for claims made during an accounting period.

Claims Paid Basis (for allocating loss costs): Estimates amounts paid on losses during the specific accounting period and ignores when loss occurred.

Closed Bidding:  When a few, well qualified and carefully selected insurers or their representatives are asked to submit competitive bids for an organization’s whole risk exposure program.

Closure:  That point in the claims negotiation where the parties have resolved their differences, but not yet formally expressed agreement.

Combination Excess Policy:  A form of excess coverage that uses elements of both the following-form and self-contained types of coverage.

Commutation:  An agreement to extinguish all liabilities between parties to the agreement.

Compensable Injury: An accidental injury, or accidental injury to prosthetic appliances, arising out of and in the course of employment requiring medical services or resulting in disability or death. An injury is accidental if the result is an accident, whether or not due to accidental means, if it is established by medical evidence supported by objective findings.

Compensation: All benefits, including medical services, provided for a compensable injury to a subject worker or the worker’s beneficiaries by an insurer or self-insured employer pursuant to this chapter.

Concealment: Failure to reveal material facts.

Concurrent Review:  Monitoring the appropriateness of hospital treatment while it is being provided.

Conditions: Policy Provisions that place qualifications on the promises of the insurer.

Conditional Contract:  An agreement that will only be performed upon the occurrence of a specified condition.  An insurer only performs its obligations when a loss occurs that is covered by the policy.

Contingent Capital Arrangement:  A pre-loss arrangement facilitating an organization’s ability to  raise cash by selling stock or issuing debt at prearranged terms in the event of a loss exceeding a certain amount.

Contingent Liability (for an annuity):  The responsibility of the indemnitor to make the annuity payments to a claimant in the event that the insurance company becomes insolvent.  The indemnitor buys the annuity in a structured settlement, is the owner of the annuity, and remains responsible for payments.

Contingent Surplus Note (CSN):  An agreement permitting an insurer to immediately issue surplus notes and raise funds at its own option.

Contingent Surplus Note (CSN) Trust:   A trust created for the sole purpose of purchasing surplus notes from an issuing insurer, at the insured’s option and at prearranged terms.

Contract of Adhesion:  An agreement that one party prepares, while the other party is only given the option of accepting it without changes, or rejecting it.  For example, a standard homeowners’ policy is prepared by the insurer, and the insured cannot make changes.

Contract of Indemnity:  Provides for payment of a loss only to the extent of the actual financial loss suffered.  Insurance policies are contracts of indemnity because the insured does not benefit from a loss; the payment is only to reimburse for actual financial loss.

Contractual Subrogation:  The insurer’s right under the insurance contract to recover from a third party who has caused a loss, after the insurer has paid its insured for the loss.

Converted Losses:  The retained incurred loss time, an applicable loss conversion factor, or the factor representing the unallocated portion of loss adjustment expenses.

Cost Allocation:  Distributing risk management costs among the component parts of an organization, i.e., departments, profit centers, or geographic locations.

Cost of Risk:  A measure of the cost of managing an organization’s risk, developed in 1962 by the Risk and Insurance Management Society (RIMS).  It includes administrative expense, risk control expense, retained loss, and the cost of risk transfer.

Cost Shifting:  When higher fees are charged to payment sources that impose fewer controls on costs.

Credit Risk: The possibility of loss for an organization that extends credit to others in the course of its activities, such as a bank.  The risk is that the borrower may default on its contractual obligation to repay the funds.

Cumulative Trauma: The concept that repeated minor stresses either of a small or inconsequential nature over a period of time result in an injury or disability.

Cut-through Endorsement, or Assumption Certificate:  Extends a reinsurer’s obligations directly to the ceding company’s policyholders, so policyholders are protected in the event the cedent becomes insolvent.

D

Declarations Page: The section of a property-liability policy that is found at the front of the policy.  This section contains information concerning the insured exposure that is “declared” by both the insured and the insurer.

Depreciation:  A financial and tax accounting term for an expense which recognizes the gradual loss of usefulness of an asset with a life of more that one year.  An annual allowance for depreciation permits the matching of revenues during an accounting period with the expense associated with the loss of usefulness of assets used to generate the revenue.

Depressed Pay-in:  An arrangement under which the insured pays the standard premium over a period longer than the policy period.

Diagnostic Related Groups (DRG): Organizations that contract with health care providers to pay a fixed fee for a particular diagnosis, regardless of the actual cost of treatment.  The health care provider has an incentive to contain costs.

Derivative:  A financial instrument whose value is based on another asset, called an underlying asset.

Direct Writer: A captive that issues policies directly to its parents and affiliates without the use of a fronting carrier.

Disability: Sometimes confused with impairment. Disability represents how an impairment combined with the person’s age, educational background, vocational background and other factors affect an injured workers’ ability to return to work. Impairment is one part of assigning an overall disability.

Discount Rate:  The rate used to discount future cash flows in present value analysis.

Direct Writer: An insurance company that does not work through independent insurance agents. The largest direct writer of WC insurance is Liberty Mutual. Agents for direct writers are employees of the insurance company.

Direct Writing Reinsurer:  A reinsurer that often does not use intermediaries, or one that deals directly with insurers.

Dividend: A return of premium calculated after policy expiration, based on the overall performance of the insurance company or of a group of insureds. Dividends cannot be guaranteed in advance, although they are often shown on proposals for insurance.

Drop-down Coverage:  Two of the functions of umbrella coverage.  The coverage drops down and takes the place of primary coverage when those limits are exhausted.  The umbrella coverage is not included in the primary policies.

Dual Trigger Cover:  An integrated risk plan that has a provision tying the retention and limit to two different types of risk.  A loss over a specified amount arising from each of the risks must occur during the policy period for the coverage to be triggered.

E

Economic Performance Test:  Enacted in 1987 to replace the all-events test.  This law generally provides that all events establishing the fact of a liability have not occurred until there is economic performance.  When goods or services are being provided to the taxpayer, the economic performance occurs as the property or services are provided.  For tort liabilities, economic performance occurs as payments are made to satisfy the liability.

Efficient Frontier (of risk portfolios):  The group of portfolios that maximize return for each level of risk.  A portfolio that does not generate the maximum return for its level of risk is said to be below the efficient frontier.

EITF 93-6 and EITF 93-14:  Advisory pronouncements issued by the Financial Accounting Standard Board suggesting the recommended treatment of certain reinsurance and finite risk insurance transactions.

Employers’ Liability:  Section B of the standard WC insurance policy, this is the part of the policy that has a dollar limit shown for the coverage. This section insures employers for liability towards employees that is not covered by the statutory WC provisions of the state (which are insured in Section A and have no set dollar limit on the policy).

Enterprise Risk Management:  A comprehensive approach to managing all of the risks of an organization together rather than managing the risks separately.

Estoppel:  The legal concept that courts will not permit a person to assert a right after acting in a way that was inconsistent with such right.  Estoppel is usually indistinguishable from a waiver.

Equitable Subrogation:  The insurer’s legal right at common law to recover from a third party who has caused a loss after the insurer has paid its insured for the loss.

Exacerbation: A temporary flare up of something related to a pre-existing condition, usually after an injury, but recedes to its former level within a reasonable period of time.

Excess Insurance:  A type of insurance that provides coverage for losses that exceed the underlying policy limit or the self-insured retention.  Excess insurance attaches above the underlying policy or self-insured retention.

Excess Losses: In the Experience Modification Factor, the amount of any single claim that exceeds $5,000.

Excess Loss Premium:  The premium charges for limiting an individual loss in a retrospective rating plan.

Excess of Loss Reinsurance Agreement: The reinsurer will pay the ceding insurer’s losses from a line of insurance if losses exceed a certain amount.  The reinsured cedes only losses, and premiums are usually a percentage of the cedent’s premium income from the lines of insurance covered by the reinsurance agreement.

Experience Based System:  A measure of the frequency and severity of claims and is used to project future costs for allocation.

Experience Fund (for a finite risk plan):  A fund into which premiums are paid and investment income is accumulated and from which the margin and losses are paid, with any closing balance returned to the insured.

Experience Modification Factor: An adjustment to Manual Premium, calculated by an advisory organization (also known as rating bureaus) such as NCCI, based on historic loss and payroll data of a particular insured.

Experience Rating:  A rating technique that adjusts the industry standard premium upward or downward based on the organization’s own loss experience.

Experience Period: The window of time from which loss and payroll data is used to calculate an experience modification factor for an employer.  Normally this window is a three-year period, starting four years prior to the effective date of the experience modifier.  However, rating bureaus do not wait until three full years of data are in the experience period before producing an experience rating for an employer.  If an employer reaches a certain, relatively low threshold of WC insurance premiums in any one of the three years in the experience period “window”, this will make that employer eligible for experience rating.

Exposure:  A possibility of a loss. Exposure data is a way of measuring this possibility of loss by using facts that reflect the likely amount of loss.

Exposure Based System:  A measure of the risk faced by an organization and can be approached on the basis of size, nature of operations, and territory.

Externality:  A positive externality occurs when an entity receives a benefit without incurring its share of the costs, a positive externality.  A negative externality occurs when another entity bears some of the costs without receiving a corresponding benefit.

F

Faculative Reinsurance:   Separate negotiations concerning exposures and premiums for each individual contract of reinsurance submitted to a reinsurer.  Each risk is a separate transaction, and the reinsurer is not committed in advance to accepting the ceding company’s request for reinsurance.

FAS 113:  A binding statement or opinion by the Financial Accounting Standard Board defining what type of transactions are reinsurance or finite risk insurance, and how those transactions must be treated for financial accounting purposes.

Fee Audit:  Examination of bills from health care providers to check that items of service are properly billed and the services appropriate.

Field Claim Representative: An insurance company employee who processes claims by interviewing witnesses, claimants, and insureds, and by arranging, through appropriate medical and repair personnel, for restoration of losses.

Financial/Market Risk:  The exposure to gain or loss in the value of financial instruments as a result of changes in market prices for the organization’s products, or as a result of changes in market rates of interest.  Financial/market risk includes interest rate risk, foreign exchange rate risk, and commodity price risk.

Financial risk:  The possibility that an organization will fail to meet its fixed financial obligations.   An example of a fixed financial obligation would be principal and interest payments on an existing debt.

Finite/Integrated Risk Plan: An integrated risk plan written on a finite risk basis.

Finite Risk Insurance Plan:  A hybrid type of risk financing plan. It transfers a limited amount of risk to an insurer.  These plans usually include some type of profit-sharing agreement between the insured and the insurer.  The risk that is transferred to the insurer is the risk that covered losses and expenses will be greater than the premium plus investment income earned by the insurer.

Finite Risk Reinsurance: A nontraditional type of reinsurance.  The insurance company cedes a limited amount of risk, shares the profit with the reinsurer, and receives credit for investment income earned by the reinsurer.

Following-Form Excess Policy: Provides the same coverage as that provided by the primary policy.  A loss above the primary policy limit is covered by the excess policy only if it is a type of loss covered by the primary policy.

Frequency (of losses):  The measure of the number of occurrences of a loss for a specific time period such as a year.

Frequency Sensitive Allocation System:  A risk management cost allocation system that responds to the number of claims rather than their severity.

Frequency Probability Distribution: This is a chart which shows the number of chance events or claims over a specified time period, generally a number of years.  The probability of the specified event or claim happening in each year is computed by dividing the number of events or claims for each year by the total number of events for the time period.  As a simple example, if 1 event occurs in Year 1, 3 events in Year 2, and 1 event in year 3, the frequency probability distribution would look like this:
# of Events
Year                                   (Frequency)                          Probability
1                                               1                                   1/5, or 20%
2                                               3                                   3/5, or  60%
3                                               1                                   1/5, or  20%
5                                   5/5, or 100%
Fronting:  An arrangement between two insurance companies to produce an insurance policy (usually WC) for a third party, wherein one insurance company produces the official policy (for a fee), but cedes all losses from that policy to the other insurer.  This kind of arrangement is used in situations where the insurer writing the risk is not an admitted company in a particular state, and the coverage needs to be written by an admitted carrier.  In order to meet the statutory requirements, the first insurer pays a second (admitted) insurer to “front” the policy, even though the first insurer remains responsible for paying all losses arising under the policy.  Captive insurers often use this kind of arrangement when they are not admitted carriers in a particular state.

Fronting Company:  Often used in captive insurance plans.  A fronting company agrees to issue insurance policies for the parent and affiliates of the captive in return for a fee.  Then, the fronting company reinsures the loss exposure with the captive.

Functional Capacity Evaluation: Testing of a person’s specific physical activities such as lifting, bending, pushing, pulling, etc., and the relationship to the ability to perform the demands of various jobs.

Funded Loss Retention Plan:  Method of risk financing where an organization uses specific assets that it has set aside to pay for retained losses.

G

Governing Classification: The classification code on an employer’s WC insurance policy that generates the most payroll aside from standard exception classifications such as clerical or outside sales (unless there is no other workplace classification applicable other than a standard exception).

Group Captive:  A captive insurer owned by multiple parent companies that are from the same industry.  The function of the group captive is to insure the loss experience of its parent companies.

Group Self-Insurance Plan:  One in which organizations group together to self-insure their combined exposures, generally workers compensation.

Guaranteed Cost: A WC insurance policy that is not subject to adjustment due to losses that occur during the policy term. In a Guaranteed Cost policy, the only variable affecting premium that should change between policy inception and audit is payroll. This is in contrast to the various kinds of Loss Sensitive plans, such as Retrospective Rating, Retention Plans, or Sliding Scale Dividend Plans, where there is a premium adjustment made based on losses incurred during the policy term.

H

Hazard (accidental) Risk:  The traditional loss exposure associated with property, liability, net income, and human resources.

Holistic Risk Management:  A comprehensive approach to managing all of the risks of an organization together, rather than managing the risks separately.

Hybrid Plans:  Risk financing plans that combine elements of loss transfer with some degree of retained losses.

I

IBNR:  Incurred But Not Reported loss reserves are estimates of the amounts to be paid on losses that have already occurred, but are not yet known by the organization.

Impairment: A medical term which is sometimes confused with disability. Impairment is what is anatomically or physically wrong with an individual and is a means where the medical care provider assigns a numerical rating for whatever type of bodily function has been lost.

Impairment Findings/Rating: A permanent loss of use or function of a body part or system as measured by a physician.

Increased Limits Factor: A number developed by the Insurance Service Office or by insurance companies to show the relationship between the amounts of losses falling within different layers of losses.  They permit comparisons of total losses at different levels of retention.  If one knows the increased limit factor, one can estimate losses from increasing a loss limit.  Thus, if the increased limit factor is 2.20 for increasing the loss limit from $100,000 to $500,000, then the forecast of losses limited to  $100,000 are multiplied by 2.20 to obtain a forecast of losses limited to $220.000.

Incurred losses:  Are Equal to paid losses plus loss reserves for losses that have already occurred.

Incurred Loss Basis (for allocating loss costs):  A measure of value of allocable losses, obtained by estimating the total ultimate value of losses that will be incurred during an accounting period.  The estimate will include amounts paid, additions to reserves, and unreported losses.

Incurred but Unpaid Liabilities:  Losses that have occurred and may or may not have been reported, but have not yet been paid.  These liabilities should appear on an organization’s financial statement.

Incurred Loss Retrospective Rating Plan:  Classified as a hybrid risk financing plan, it is an insurance plan that adjusts the insured’s premium upwards or downwards, subject to minimum and maximum premiums, based on the insured’s actual loss experience.  This plan requires that the insured pay a deposit premium at the beginning of the policy period.  The deposit premium is calculated at the end of the period based on the actual incurred losses of the insured.

Independent Agents and Brokers:  Generally limit their activities to a small geographical area, such as one city.  They try to provide a high level of personalized service to clients.

Independent Medical Exam (IME): An examination of an injured worker by a physician other than the worker’s attending physician upon the request of the insurer or claimant.

Individual Case Estimate Method or Case Based Reserve:  Requires estimates for loss reserves to be made separately for each individual claim.

Informal Retention:  A risk financing plan where the organization pays for losses as they occur out of the organization’s cash flow and/or its current assets.  This type of retention requires very little planning, and no records are kept of losses.  Instead, losses are treated as an expense.

Insurable Interest:  A financial stake that will be jeopardized or lost if a covered loss occurs.  A person who insures a building that he does not own has no insurable interest because the person has no financial loss when the building burns down.

Insurance Charge:  A premium for limiting total losses in a retrospective rating plan.

Insurance Derivative: A specialized financial contract whose value is tied to the level of insurable losses occurring during a specified length of time.  The value of the insurance derivative is thus based on the level of insurable losses that occur during the specific period.

Insurance Linked Securities:  Financial investments with imbedded insurable risk, i.e., bonds.

Insurance Option: A derivative whose value is based on insurable losses.  These losses may be specific to an organization’s actual insurable losses or to an index of losses covered by a group of insurers.

Insurance Securitization:   Creates Marketable insurance-linked securities whose values are based on the cash flow obtained from the transfer of insurable risks.  An example is a catastrophe bond that transfers to investors insurable catastrophe risk.

Insuring Agreement:  The policy provision(s) that contain the promise of the insurer to provide a payment or to perform a service under circumstances described in the policy.

Integrated Risk Plan:  An insurance plan providing a single block of risk transfer capacity over several types of risk exposures, including certain speculative risks.

Interest Rate Risk:  The possibility of gain or loss resulting from changes in the market rates of interest.

Interest Rate Risk (finite risk insurance plans): The risk that interest rates will be above or below the expected rate over the term of the policy.

Intermediary: An agent, broker or other third party to market for an organization.  Intermediaries usually are paid on a commission basis.

Internal Fund:  Fund used to pay for retained losses. Consists of current assets that are specifically dedicated to that purpose.

Interstate Rating:  An experience modification factor that applies across more than one state.  Interstate ratings are calculated by NCCI for employers whose past workers compensation insurance policies show payroll in more than one state.  Most, but not all states, participate in the interstate rating system.  A few states, such as Michigan, Pennsylvania, and Delaware, do not participate in interstate rating, but instead continue to calculate separate experience ratings for employers who operate in their jurisdictions, even if those employers also qualify for interstate rating.  Those employers thus have one experience modifier applying to their operations in most states but a separate modifier calculated by the stand-alone state rating bureau.  The separate stand-alone mod would apply only to workers compensation insurance premiums developed for the employer’s operations in that stand-alone state.

Investment Risk (under an insurance contract): The risk that the insurer’s investment income will be greater or less than management’s expectations over the policy period.

Involuntary Conversion: An accidental property loss for tax purposes, but it includes theft, condemnation, requisition, and seizure, as well as damage or destruction of tangible and intangible property.

Involuntary Conversion Option:  To purchase replacement property like the property destroyed within 2 years of the loss.  Under the rules for involuntary conversion, the owner’s adjusted basis in the replacement property will be reduced to the extent the insurance proceeds exceeded the reduction in property value from the loss.

J

Joint Tortfeasors:  Two or more persons or corporations that are responsible together for causing harm to another.  The persons or corporations may have acted together or separately in causing a single harm.  A joint tortfeasor release is a special release drafted to release one tortfeasor without releasing other joint tortfeasors.  A joint tortfeasor release allows one of several joint tortfeasors to reach a settlement with the claimant without jeopardizing the claimant’s right to recover additional compensation for the non-settling tortfeasors.

K

L

Large Deductible Insurance Plan:  An insurance plan for liability lines of insurance (workers’ compensation, general liability, automobile liability) that includes a per accident/per occurrence deductible that is greater than $100,000.

Large Line Capacity:  An insurer’s ability to assume a large exposure under a single primary or excess policy of insurance.

Law of Large Numbers:  The larger the number of exposure units, the closer the actual loss experience will come to the expected loss experience, making loss outcomes more predictable in the aggregate.

Layer:   Comprised of the portion of individual losses that fall within a particular range of losses.

Liquid Asset:  An asset such as cash or marketable securities that are easily converted to cash without a reduction in value.

Limit:  The maximum amount that an insurer will pay under the policy.

Litigation Management:  The process of controlling the cost of legal expenses for claims in litigation.

Long-term Asset:  An asset which has a useful life of more than one year.

Loss:  An outcome that reduces the financial value of an organization.

Loss Conversion Factor:  A factor applied to incurred losses to account for unallocated loss adjustment expenses.

Loss Development:  The tendency for incurred losses to increase over time as a result of late reporting of unanticipated losses and because of the upward revision of case reserves.

Loss Development Factors:  Numbers developed from historical dates which, when multiplied by the dollar amount of losses, will show the expected increase in aggregate losses that will eventually be paid for each historical year.  Loss development factors may be obtained from insurance service and trade organizations, or from an insurer’s own historical loss data.  These factors are used primarily for forecasting liability losses, and not for property loss forecasting.

Loss Exposure: Anything that presents the possibility of a loss.

Loss Limit:  The maximum loss amount payable for each individual accident or occurrence that is used in calculating the retrospectively rated premium.

Loss of Income Coverage, or Business Income Coverage:  Coverage in the event an organization suffers a loss of net profit, plus expenses that continue for the period that the organization is shut down as the result of a covered loss to property.

Loss Payout Pattern (of present value analysis):  Measures the timing of cash payments for losses and loss adjustment expenses.  The pattern allows an organization to determine the amount of money that needs to be set aside today to make future payments for losses.

Loss Portfolio Transfer:  A retrospective arrangement applying to an entire book or portfolio of losses.

Loss Ratio Method or Formula Reserve Method:  Requires estimates for loss reserves to be computed using a ration of losses and loss adjustment expenses to premiums.

Loss Reserves:   Estimates of amounts that will be paid on losses that have been reported to the organization.

Loss Triangles:  Tables of dollar amounts for losses, and from these tables, loss development factors can be calculated.  The dollar amounts appear along the hypotenuse of a triangle.

Lost wages: Consists of temporary payments made when injuries are severe enough to prevent the injured from working. The terms “temporary total disability”, “lost wages”, and “workers’ comp payments” generally mean the same thing. Most systems provide for payment of two-thirds of the workers gross wages up to a pre-determined limit. These benefits are generally paid every two weeks, and are not taxable.

M

Managed Care:  A fee arrangement with health care providers that provides incentives for them to limit use of medical procedures and equipment.  Managed care includes preferred provider organizations, health maintenance organizations, and diagnostic related groups.

Managed Care Organization (MCO): An organization with which an insurer may contract to provide medical services.

Management Fee:  A system of compensation that provides for the intermediary to receive a minimum annual fee from a client, and commissions paid to the intermediary by insurers are credited against the amount of the fee.

Manual Premium: WC premium calculated by multiplying payrolls by appropriate rates, before application of Experience Modifier, Schedule Credit, or Premium Discount.

Manuscript Policy: Individually negotiated by the insured and the insurer.  The terms and conditions of this of policy are drafted specifically for this contract and for this insured.

Margin in a Finite Risk Plan:  The amount charged for the insurer’s underwriting risk, investment risk, credit risk, and administrative expenses.

Maximum Premium: The largest amount of premium owed under a retrospective rating plan, regardless of the amount of losses.

Mean (of a Probability Distribution): Frequency of claims is the average frequency.  The mean is calculated by multiplying the outcome (frequency) by its probability and summing the results.

Mediation:  Intercession by a disinterested third party to seek an acceptable agreement for resolution of a dispute.  Mediation suggests an attempt at compromise through discussion, goodwill and persuasion.

Medically Stationary: No further material improvement would reasonably be expected from medical treatment, or the passage of time.

Medical Mileage: Payment to the injured worker for mileage to and from the doctors office exists in most workers’ compensation systems. “Medical mileage” is generally considered to be a medical benefit.

Medical-Only Claims: Claims for which the only cost is medical care, without any lost-time benefits being paid.

Minimum Premium:  The lowest amount of premium owed under a retrospective rating plan, regardless of the amount of losses.

Misrepresentation:  A false statement of material fact.  Insurers can deny a claim for innocent as well as intentional misrepresentation.

Modified Work: When the physical or durational demands of employment duties must be altered to accommodate a patient’s impairment, that worker is said to require “modified work.”

Modified Premium: WC premium calculated after application of Experience Modification Factor. Similar to Standard Premium, but does not reflect any Schedule Credits or Debits.

Moral Hazards:  A form of peril that exists when an insured or some other persons intentionally causes a loss.

Morale Hazard, or Attitudinal Hazard:  Form of peril when insureds are careless or less careful than they should be.  Insureds may be poor housekeepers due to the fact that they know the insurer will pay in the event of a covered loss.

N

NCCI: The National Council on Compensation Insurance–the organization responsible in many states for determining proper WC classifications, Experience Modification Factors, and collecting data used for ratemaking. NCCI also writes the manuals used in many states to calculate WC premiums, and also administers the Assigned Risk Plan in many jurisdictions. NCCI is a private organization, not connected with government, although it is often mistakenly thought to be a governmental agency.

No-Release Settlement: An immediate payment for a minor complaint or claim to maintain goodwill or to forestall litigation, and the organization does not request a release in exchange for the payment.

O

Objective Trigger:  A measurement determining the value of an insurance capital market product based upon something outside the control of the risk-transferring organization, such as an industry loss index.

Obligee: One of the parties of a surety contract.  The obligee is the party to whom the principal owes an obligation to perform.

Off Balance Sheet Fund: An organization’s funds that are held by a third party such as an insurance company.  These funds do not show up on the firm’s balance sheet, but they are available to pay the retained losses of the organization.

Open Bidding:  Seeking competitive bids by advertising for bids from all qualified intermediaries who want to bid on the coverage.

Operational Risk:  The risk that is inherent in the operation of a business.  This risk differs for different businesses, but it includes business risk, financial risk, operating risk, credit risk, hazard risk, and brand name or reputation risk.

Operating Risk:  The possibility of loss resulting from a failure or breakdown of an organization’s functioning systems.  Such a failure or breakdown would cause an increase in expenses and a reduction of revenues for an organization.

Option: A contract giving the holder the right to buy or sell an asset at the strike price during the contract term.

Other Insurance Provision:  An insurance policy provision which deals with overlapping or duplicate coverages.  Such provisions prevent an insured from recovering more that the amount of his or her loss, and they determine what portion of the loss each insurer will pay.

Over-reserving:  Setting aside more than the present value of future loss payments for a claim.

P

PCS Options:  Call option spreads whose value is based on national, regional, and stated catastrophic loss indices compiled by the Property Claims Service (PCS) of the Insurance Services Office (ISO),

Paid Losses:  The amounts already paid for losses that have occurred.

Paid Loss Retrospective Rating Plan:   Classified as a hybrid risk financing plan, it is an unfunded plan for the retained portion of losses.  The insured pays a small deposit premium at the beginning of the policy period.  The insured must then reimburse the insurer for losses as the insurer pays them, subject to minimum and maximum amounts.

Palliative Care: Medical service rendered to reduce or moderate temporarily the intensity of an otherwise stable medical condition, but does not include those medical services rendered to diagnose, heal, or permanently alleviate or eliminate a medical condition.

Parol Evidence Rule:  Provides that a court will not admit evidence of the parties’ negotiations for the purpose of varying the terms of a written agreement that is complete on its face.  The court will consider the written agreement to be the final agreement reached by the parties, and any prior negotiations or agreements are presumed to be part of that agreement.

Peer Review:  Examination of health care of panels of medical professionals to determine whether treatment followed acceptable guidelines.

Perils:  Causes of loss that lead to damage or destruction of property.  Examples of perils include fire, lightning, windstorm, and hail.

Period to Period Factors:  Reflect the year-to-year increase or decrease in the development of loss costs.  They can be used to compute loss development factors.

Permanent Disability:  If the injured worker suffers permanent disability as a result of his or her injury, he or she will often be able to recover a permanent disability payment. Generally, a determination of “permanent” disability will not be made until the injured worker is considered to be “medically stationary” or “medically stable”. Depending on the nature of the injury, a permanent disability award will either be “scheduled” or “unscheduled”.

Permanent Partial Disability (PPD): Generally means that the injured worker cannot return to the same type of work that he was doing before his injury and that he/she has a permanent impairment that limits his ability to do the same type of work as before the accident.

Personal Contract:  Requires the person entering into the agreement to perform it because the agreement was based on the skill, knowledge, or other qualities of that particular person.  A homeowners policy will only insure the named insured’s home, and cannot be assigned to a new owner who buys the home.

Planned Loss Retention:  Method of risk financing where a firm has evaluated its exposures to loss and has decided on a specific retention plan.

Policy Acquisition Costs:  Costs initially incurred by the insurance company at the time the policy is issued.  They include premium taxes and agent’s commissions, as well as other underwriting expenses.

Policy Provisions:  Parts of an insurance policy that constitute the various agreements that make up the contract.

Pool:  A group of insureds who come together for the purpose of insuring each other’s risk of loss.  Each member contributes a premium based on its loss exposures, from which losses of the pool members are paid.

Portfolio Reinsurance: Assuming the obligations of a primary insurer in an entire class, territory, or book of policies.  The reinsurer moves into the shoes of the primary insurer, and is not just reinsuring a portion of the exposures.

Pre-Admission Certification:  Approval for hospital admission or surgery before the treatment is provided.  This process is one of the procedures used in utilization review.

Premium Capacity:  Refers to the aggregate premium volume an insurance company can write during a year.

Preferred Provider Organization (PPO): A provider or group of medical providers who provide discounted service fees in return for a high volume of referrals.

Present Value:  The amount to be paid out in one year that, if invested today at the discount rate, will increase to equal the amount that will be needed in one year.

Present Value Factors: It is the factor that is multiplied by future dollar amounts to determine the present value of those amounts.

Primary Insurance (underlying insurance):  The layer of insurance that sits below the excess or umbrella layer of coverage.

Principal (Obligor):  One of the parties to a surety contract.  The principal (obligor) is the party that has an obligation to perform for the benefit of the obligee.

Principle of Disclosure:  Requires the parties to an insurance contract to disclose important information.  Insurance contracts require the parties to act with the utmost good faith, so applicants must give insurance companies all information that could reasonably affect the underwriting.

Principle of Equity:  Requires parties to conduct their dealings fairly.

Principle of Indemnity:  Limits a recovery so the insured is compensated for a loss but receives no more than what is required to make the insured whole.  The insured cannot profit from a covered event.

Probability Interval (of a total loss probability distribution):  Shows the likelihood of outcomes falling within certain ranges around an expected value of losses, and is determined by an area under a probability distribution curve.

Projected Ultimate Losses:  The estimates of total payouts that will finally be made on particular claims.

Promissory Warranty:  A policy condition that must exist through part or all of the policy period.  For example, the commercial property policy may contain a promise that a burglar alarm will be maintained throughout the policy period.

Pro Rata Reinsurance Agreement, or Proportional Reinsurance Agreement:  A reinsurance agreement in which the insurer shares premiums in the same proportion as losses.

Prospective Plan:  An insurance plan designed to cover losses arising out of future events.

Protected Cell Company:  A type of captive in which each member’s capital and surplus is segregated and protected from other members.  Also, third parties cannot access the assets.

Psychiatric and Substance Abuse Review:  Evaluates psychiatric and drug cases to prevent unnecessary hospitalization and to recommend alternative treatments.

Public Adjuster:  Represents insureds in processing claims and helps insureds to perfect their rights to insurance proceeds.  Public adjusters are paid as a percentage of the adjusted loss, hourly, or on a per case basis.

Put Option:  A contract giving the holder the right to sell an asset at a predetermined price.

Q

R

Rating Bureau: See NCCI. Some states maintain their own separate rating bureau, although these often follow NCCI rules and use NCCI manuals. Currently, the states of California, Delaware, Hawaii, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wyoming operate their own non-NCCI rating bureaus. Many of these largely follow NCCI rules for computing premiums and classifications, but California, Delaware, Texas, and Pennsylvania are notably different than NCCI in some aspects of classification and premium computation.

Reasonable Expectations:  The principle under which an insurance company is required to provide the uninsured with the benefits a person would reasonably expect to obtain by buying insurance, even if the language of the policy does not provide them.

Regional Brokerage Firm:  An insurance intermediary that focuses its operation in one particular geographic area.

Regular Work: The job the worker held at the time of injury, or a substantially similar job.

Reinsurance:  The process by which one insurance company pays a fee to transfer its insured loss exposures to another company (the re-insurer).  Reinsurance is purchased by the insurer to increase its insurance capacity or to stabilize its underwriting results.

Reinsurance Intermediary, or Reinsurance Broker:  An independent firm that provides services to insurers and reinsurers in the reinsurance transaction.

Release: Giving up a right or claim by the person untitled to enforce the right or claim.  A release is usually a standard document signed by the party who gives up a claim in exchange for a payment of compensation.

Remuneration: The basis for calculating WC premium, primarily payroll, but may also include other forms of employee compensation. WC premium is computed by applying varying rates.

Rent-a-Captive:  An arrangement under which an organization rents capital from a rent-a-captive facility, pays a premium, and receives reimbursement for losses, as well as credit for underwriting profit and investment income.

Representation:  Statement of fact or opinion made by the applicant for insurance.

Reputation Risk:  Also known as brand-name risk.  The possible real or perceived loss of reputation or the blemishing of a brand name.

Residual Market: Workers’ Comp written through an Assigned Risk Plan.

Request for Proposal (RFP):  Describes the purpose and scope of the consulting services sought by an organization, and it provides enough information so that a consultant can determine whether it wants to have the organization as a client.

Retroactive Plan:  An insurance plan designed to cover losses arising out of events that have already occurred.

Retrocession:  The transaction of a reinsurer that shares some of its reinsurance risk with another reinsurer.  The reinsurer, in effect, transfers a portion of its obligations acquired through a reinsurance transaction.

Retrospective Cost Allocation System:  Costs are allocated on the basis of loss experience for the current accounting period.  While costs are estimated at the beginning of the accounting period, adjustments to the estimated loss experience are based on the actual loss experience for that accounting period.

Retrospective Premium Formula:   An equation establishing the retrospectively rated premium as equal to the sum of the basic premium, the excess loss premium, and converted losses, all times the tax multiplier, subject to a minimum and maximum premium.

Retrospective Review: Examining medical treatment after the treatment was provided, in order to gather information about unnecessary or excessive services to provide guidance for the future.

Retrospective Rating: A WC insurance policy that makes a subsequent adjustment to premium after policy expiration, based on losses generated during the policy period. The adjustment can go up or down within set parameters, based on the losses generated during the policy period.

Retention: A risk financing technique where an organization uses its own resources to pay for its own losses.

Retention by Default:  The opposite of planned retention occurs when an organization makes no attempt to evaluate its loss exposures and makes no specific plans for financing those losses.

Retention Plan: Similar to Retrospective rating, this is a WC policy format that adjusts the premium, up or down, based on losses (and associated costs) that occur during the policy period.

Retrospectively Rated Insurance:  An insurance plan where the ultimate premium paid by the insured is calculated after the end of the policy year based on the insured’s actual losses during the year.  Retrospectively rate insurance plans can be constructed as either incurred retrospective plans or paid loss plans.

Risk:  The potential variation in outcomes.

Risk Bearing System:  A risk management cost allocation system that allocates costs to departments according to which department generated the loss.

Risk Charge:  A load added by the insurer to an insurance premium over and above the expected loss cost to compensate the insurer for taking the risk that actual losses might be higher than expected.

Risk Averse:  Persons or organization who will prefer to receive certain amounts, even if that amount is less than the expected payout.

Risk Distribution:  A sharing of losses by an insurer among the insureds.

Risk Financing:  Method of obtaining funds with which to pay or offset an organization’s losses.

Risk Management Consultant:  Provides advice on risk management issues for a fee, and does not sell insurance.

Risk Neutral:   Persons or organizations who are indifferent when choosing between receiving a certain amount or receiving an amount that is the expected value of a set of uncertain outcomes.

Risk Retention Group:  Group Captive formed and regulated under the Liability Risk Retention Act of 1986.

Risk Shifting:  A transfer of risk of loss to an insurer.

Risk Takers:  Persons or organizations who prefer the uncertain outcomes as compared to the certain amount equal to the expected value of the uncertain outcome.

S

Schedule Credit/Debit: A discretionary premium adjustment based on underwriter’s evaluation of special characteristics of a risk not reflected in the Experience Modifier.

Scopes Manual: Manual produced by NCCI, which details what kinds of workplace exposures belong in particular WC classification codes.

Self-Contained Excess Policy:  Unlike the following-form excess, depends on its own policy provisions for coverage.

Self-Insurance Plan:  A formal retention plan where their organization has made a conscious decision to retain losses and maintains a formal system for paying for the retained losses.  The organization keeps a record of its losses in this type of retention plan.

Self-Insured Retention Plan:  A formal retention plan that uses an insurance policy to provide benefits above the retention.  The insurance policy is said to attach when the self-insured retention is exceeded.  Self-Insured retentions are different from deductibles.  With a self-insured retention, the insured is responsible for adjusting and paying losses that are within and up to the self-insured retention level.  With a deductible plan, the insurer adjusts and pays all losses, and is reimbursed by the insured for losses that are below the deductible.

Self-Insured Retention (for an Umbrella Policy):  Arises when a loss is not covered by an underlying policy, and the insured then must pay a specified amount before umbrella coverage applies.  Where an umbrella policy provides coverage for a claim that is not covered by the underlying policy, the insured must retain a portion of the loss before the umbrella policy will respond.

Settlement:  The resolution of a claim by an agreement between parties as to the payment for loss.  Settlement is usually embodied in some document signed by the parties.

Severity (of Losses):  A loss characteristic which indicates the size of losses in terms of the dollar amount that must be paid to recover from the loss.  Severity can be used to describe an individual loss, or losses in the aggregate.

Severity Probability Distribution:  Shows the values of chance events (dollar amounts of losses)  and the probability associated with each.

Short Rate Penalty: A penalty applied by insurers when a WC insurance policy is cancelled by the insured before the expiration date of the policy. This penalty is steep in the early days of the policy, and gradually tapers off the closer the policy gets to the expiration date

Short-term Asset:  An asset that is completely used up within one year of its acquisition.

Single Parent Captive (Pure Captive):  A captive insurer formed to insure only the loss exposures of its parent and affiliated companies.

Sliding Scale Commission Rates:  Provide for the commission rate to drop for larger policies.

Sliding Scale Dividend: A return of premium, after policy expiration, based on the actual loss experience of the insured business. The size of the dividend varies with the actual loss ratio of the insured business.

Specific Excess Policy: An excess policy that provides coverage for losses in excess of one accident or occurrence.  It is usually written over a self-insured program where the insured retains a certain amount on a per accident/occurrence basis.

Speculative Risk:  Has gain or loss as possible outcomes. Compared to Pure Risk which presents only two possible outcomes,  loss or no loss,  a gain is not possible.

Stair Step Reserving or Reserve Creep:   Increasing loss reserves by some multiple when initial reserves appear insufficient for a claim.

Standby Credit Facility:  A pre-loss arrangement with a financial institution facilitating the organization’s obtainment of a loan in the event of a loss.

Standard Exception: Classifications, which are normally not included in the governing classification. These are clerical, outside sales, and often (but not always) drivers.

Standard Premium:  Premium after application of Experience Modifier and Schedule Credit or Debit, but before Premium Discount.

Strike Value:  The value of insurable losses that must be exceeded before the buyer of an insurance option will receive cash benefit from the option.  The strike value is similar to an deductible with an insurance policy.

Structured Settlement:  A settlement in which payments are made in installments.

Subrogation:  Prevents the insured from collecting loss payments from his or her own insurer and from the responsible third party for the same loss.  Once the insurer pays a loss caused by a third party, the insurer takes over, or is subrogated to the insured’s common-law right of action against the negligent third party.

Subrogee:  The one who succeeds to the rights of another and is not a volunteer, but has a legal obligation to pay the debt.

Subrogor:  The party whose claims and rights are succeeded to.

Subsidy:  A partial payment toward a purchase. Serves as an incentive for the purchase.  For example, the deduction for insurance premiums is a subsidy that provides an incentive to buy insurance.

Surety:  One of the parties to a surety contract.  The surety guarantees that the principal will perform its obligation to the obligee.

Surplus Notes: Notes sold by an insurance company to investors to raise cash.  Surplus notes are charged to policyholders’ surplus on the statutory balance sheet, instead of as a liability.

Surplus Relief: A benefit of reinsurance for the primary insurer, because by ceding a portion of the exposure, the primary insurer’s policyholder surplus will increase.  Statutory accounting requires the primary insurer to show the expenses and premium collected for a new policy as a liability on its balance sheet.  The liability reduces the policyholder surplus, which is the excess of assets over liabilities.  Through reinsurance, the primary insurer cedes a portion of the coverage and removes a portion of the expenses and premium collected from the liabilities on the balance sheet, so policyholder surplus increases.

Swap: A contract to exchange a payment stream at specified times, known as settlement dates or payment dates.

Systematic Risk, or Undiversifiable Risk: Gains or losses on a portfolio of risks where gains or losses that tend to occur at the same time, rather than at random.  The risks affect all businesses at the same time, rather than just a segment of the economy.  Diversifying investments among different businesses cannot reduce this systematic risk.

T

Tabular Value Method:  Requires estimates for loss reserves to be made using actuarial tables in cases involving long payout periods, such as workers compensation, disability, or death claims.

Tax Multiplier: A factor for adding an amount for state premium tax, license fees, service bureau charges, and residual market loadings to the premium.

Temporary Partial Disability (TPD): Generally means that the injured workers is only able to do some type of limited work for a short period of time and that further recovery is expected.

Temporary Total Disability (TTD): Generally means that a person is unable to do any type of work for a temporary period of time. Workers’ compensation payments are usually paid while the injured worker is out of work.

Third Party Administrator: An outside or third-party organization that handles claims for an insurer or a self-insurer.

Third Party Business:  Business written by a captive that is not directly related to the business of the captive’s parents and affiliates.

Timing Risk: The risk the insured’s losses will be paid faster or slower than expected.

Total Loss Probability Distribution:  Developed by combining the values of a severity distribution with those of a frequency distribution to develop a listing of the ranges of losses around expected average losses and their probability of occurring (Average frequency x Average loss = Expected loss).

Tranche:  A separate class of security that differs in terms of risk assumed by the investors.

Transfer: A form of risk financing where one organization (the transferor) uses another organization’s (the transferee)  resources to pay for the losses of the first organization.

Treaty Reinsurance:  A contractual arrangement whereby a reinsurer agrees to reinsure all policies of a certain type written by the cedent.  Terms and provisions are set in advance for each policy reinsured under the treaty.

Trend Factors:   Factors, generally expressed as a percent, which are applied to past losses to bring the historic costs up to the current cost level.  There are two types:  loss trend factors are applied to historic losses, and exposure trend factors are applied to exposures such as sales or payroll.

U

Ultimate Value of a Claim:  The total amount that will be paid to settle a claim, including claim payments and claim administration expenses.

Umbrella Liability Policy:  A form of excess policy that provides coverage above the primary insurance.  Its distinguishing feature is that it provides some coverage that is not included in the primary policies.  The coverage is subject to a self-insured retention on the part of the insured or insurer.

Unallocated Loss Adjustment Expenses (ULAE):  Costs associated with claims handling, but these costs are not attributed to particular claims.  These expenses can still be allocated among departments, using a cost allocation system.

Unbundling:  Offering services separately and collecting separate fees for each service. Unbundling insurance services may mean premiums can be reduced, since an applicant need not buy all services.

Unconscionable Advantage:  The principle in insurance law that the insurer should not use the insured’s lack of information and bargaining clout to take unfair advantage.

Underlying Asset:   An asset, such as  commodity prices or the magnitude of insured losses, that determines the value of an insurance derivative.

Underreserving: Setting aside less than the present value of future loss payments for a claim.

Underwriting Risk ( for a finite risk plan):  The risk that the insurer’s losses and expenses will be greater or less than the expected premium income plus investment income.

Unfunded Loss Retention Plan: A method of financing losses when no assets have been specifically set aside to pay for retained losses.

Unsystematic Risk, or Diversifiable Risk:   Gains or losses on a portfolio of risks occur randomly.  Diversification can reduce this systematic risk.

Usual, Customary, and Reasonable Charge (UCR):  A common requirement limiting reimbursement under health insurance contracts to a rate that is reasonable.

Utilization Review (UR):  Evaluating medical care in terms of its necessity, frequency, and cost in order to determine whether treatment has been unnecessary or inappropriate.

Utmost Good Faith:  The requirement that parties to an insurance contract act toward each other with scrupulous honesty and make full disclosure of relevant facts.

V

Vocational Rehabilitation: If an injured worker cannot return to his or her job after injury, and has a permanent disability, he/she may be entitled to vocational rehabilitation assistance. The level of this assistance varies greatly between jurisdictions. The level of assistance ranges from simple help with the drafting of a resumé all the way through full payment of time loss while the person gets two years of training. There is a set maximum amount paid toward schooling costs.

Voluntary Payments:  Expenditures for first-aid, short term medical costs, or personal property damage, regardless of fault.  An organization makes voluntary payments for good public relations and to avoid suits.

Voluntary Compensation: An endorsement to the standard WC insurance policy, which extends coverage to employees not required to be covered under the state’s statutory WC provisions.

Voluntary Market: WC insurance written outside of the Assigned Risk Plan.

W

Waiver:  The voluntary relinquishing of a known right.

Warranty:  A condition that must be satisfied for coverage to be granted.

Working Layer:  The layer of excess coverage that sits between the primary layer and the umbrella layer.

X

Y

Z