Claim Severity vs. Frequency Effect – One Claim Can Ruin Your Mod

July 30, 2013 By JL Risk Management Consultants

Claim Severity – Where One Claim Can Ruin Your Mod

The Claim Severity vs. Frequency Effect can result from one claim. One severe claim cannot hurt your Mod as bad as a number of smaller claims. This is one of the misnomers that exists today in Worker Compensation insurance rating system.

Diagram of One Claim Severity vs. Frequency

fhwa.dot.gov

The frequency statement is partially true. Late last month, our company consulted with an employer who previously had a .87 Mod.

The employer had incurred a very severe accident that was going to show up in their Mod at renewal. The employer was not a micro-employer. According to the size segments used by the Feds, they were still considered a small employer.

Using the prior data, we were able to forecast the Mod of the one claim. The Mod was going to jump from .87 to over 1.50 in one year. I thought, hold on a minute, everyone has always been told that one bad claim will not wreck a company’s Mod.

One thing that helped the employer is that almost all states have limited losses. This is a limit that kicks in when Total Incurred (Paid + Future) reaches a certain level. In this case the limit was approximately $220,000. The limited loss was used when calculating the 1.50+ Mod.

I decided (on my own time) to re-calculate the Mod using four claims of 55,000 which would be the same value as the limited loss. The Mod was recalculated with the four claims and the Mod ended up at 1.79.

The statement that one bad claim cannot harm your Mod is not always true. One bad claim can harm your Mod. However, the other statement that is often mentioned held true. Frequency does affect the Mod more than severity. In the real-world example, the Mod was higher by .29.

Business People Claim Severity In Conference Room

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The size of the difference between the severity and frequency has other factors that should be mentioned such as:

Employer size
Payroll amount
Previous Mod
Classification Codes
Number and severity of prior claims
Insurance carrier Loss Cost Multiplier

The takeaway from this article is that a safety program is very important to even avoid one bad accident or a series of accidents. This will make your next renewal a less painful process.

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Self Insureds – Do You Know If Your Excess Insurer Has Been Notified?

February 26, 2013 By JL Risk Management Consultants

Self Insureds Need To Monitor Excess or Reinsurer Notification

Do you know if your self insureds has been notified? Workers Compensation excess insurance (reinsurance) can often go unnoticed in all the inner workings as a file progresses towards its conclusion. A reinsurer denying coverage because they were never put on notice is very rare for Workers Comp.

House of fire Self Insureds insurance association

Wikimedia Commons – Laima Gūtmane

A recent article where the underlying insurer sued their excess insurer pointed out the “rock and a hard place” the excess insurer is placed in when it has no knowledge of a claim that may require payment. Most liability insurers are very careful when it comes to reporting claims that may reach above the primary insurance level.

For instance, an example of where a self insured employer may end up paying out of pocket:

Employee has serious injury
Total Incurred (Reserves + Paid) is set at $295,000.
Small paid amount = $17,400
Reserves are above the reinsurance reporting threshold of $200,000
Overloaded TPA claims adjuster and supervisor do not report claim to reinsurer
Three years later, settlement is recommended that will cause the total claims payout to exceed $300,000.
TPA decides to report to reinsurer at this late date
Reinsurer is not happy as they were not involved in negotiating the settlement
Reinsurer should have had an initial status from the TPA three years ago when the Total Incurred exceeded $200,000

Picture of Self Insureds man empty pocket and dollar sign

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Which party has the ultimate responsibility? The responsibility is with the employer. Of course, the employer could pursue the TPA.

How does a self insured employer avoid this situation? The avoidance mechanism should already be in place. When the TPA contract was agreed upon, were there reserve levels that should have the employer’s approval before the increase by the TPA?

Self insured employers will often remark that the “reserves are not that important” as we do not pay premiums. That may be true, but Workers Comp reserves can also be used as an alert when they reach certain levels – one of them being the reinsurance reporting level.

There are some TPA computer systems that will automatically report a claim to the reinsurer when the reserves reach a certain level. The reinsurer will usually ask for a full report once the TPA system flags a certain claim.

Reinsurers have become more analytical and not just an insurance commodity. Denials of coverage by the excess insurers may become more commonplace.

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Workers Comp Reserving Is Art – Not Science

July 10, 2012 By JL Risk Management Consultants

Workers Comp Reserving Is An Art

Should Workers Comp reserving be compared to a Picasso? One of the most difficult tasks that Workers Comp adjusters face (especially inexperienced ones) is setting the reserves on a file. A large number of people seem to think the reserves are just automatically calculated and this is the way that reserves are set on a claim.

The first time I had come across this was examining a loss run from one of the state funds quite a few years ago. The adjuster had responded to an email saying they did not necessarily agree with the reserves, but they did not want to change them as the unnamed system had set the reserves.

The file, at the time, was horribly over-reserved as the medical circumstances had changed dramatically. The file was going to really affect the insureds E-Mod/X-Mod. I had to actually talk to a VP-level employee of the fund to have the reserves reduced even though the file was obviously top-heavy on reserves.

I should take a step back. The reserves in the file are Total Incurred = Paid + Reserves. The total incurred figure is what the insurance carrier will report to the rating bureau or NCCI. That is why reserves are so important. Reserves are the outstanding funds that are charged to the employer’s E-Mod/X-Mod beyond what has been paid.

Graphic of Person On Puzzles Workers Comp Reserving Is An Art

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In the previous example, the Workers Comp system sat the reserves with little input from the adjuster. This can cause great complications as each injured worker will heal differently. Each employer will have a different set of return to work values – not all employers have light duty programs.

As any experienced Workers Comp adjuster will attest, the numbers of years of experience adjusting in a certain territory, state, or with certain employers will result in the most accurate reserves. There is no substitute for experience in this area, no matter how great of a WC computer system is in place.

Adjusters have a great balancing act that is performed with reserves on a daily basis. If the reserves are too high, the employer could be overcharged for funds that were never actually used to pay benefits. If the reserves are too low, the carrier, and in turn the employer has to adjust for large unexpected reserve increases.

Hand Illustrating Dollar And Man Workers Comp Reserving Balancing

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That is exactly why reserving is an art, not a science. Applying some multi-variable statistical function to a claim is never going to result in the claim having the proper reserves. The statistical generator may be good in the short term, but usually is not that accurate in the long term.

An experienced WC adjuster should be able to override any reserve that is within their authority levels. Let the artist paint on their canvas. If there is a stat package that is calculating the reserve, then an adjuster should be able to make the reserves fit the file.

Why did I write this article? We just received in a loss run from a statistical generator-type reserving system. The reserves are not even in the ballpark.

©J&L Risk Management Inc Copyright Notice

Workers Comp Dates Upcoming Important Ones For Your Calendar

May 21, 2012 By JL Risk Management Consultants

Very Important Workers Comp Dates

One of the most important Workers Comp dates is upcoming. Timing is everything with reducing your Workers Comp claims and premiums. There are a few upcoming dates that are very important for Workers Comp polices in the regular market.

Picture of Pen On The Top Of Calendar Workers Comp Dates Very Important

If your company has a January 1 renewal date, your Workers Comp reserves will soon tabulate on June 30th for your 2013 policy. If you have not started your Workers Comp reserve reduction program, the time is running very short.

Insurance carriers are not known for quickly reducing reserves on files. One of the main reasons is a larger file may have to navigate its way through the insurance hierarchy to have any changes to the reserves. A file reserve of $250,000 may have to cross at least six desks and be reported to the reinsurer before the reserves are added into the file. At 4 days each desk, the total time to have the reserves decreased to a more proper level may take up to one month after the adjuster makes their reserve reductions. Many meetings take place between the adjuster, their senior adjuster, supervisor, manager, VP, examiner to have file reserves decreased.

The Workers Comp claim formula is Total Incurred = Paid + Reserves. You can do little to change what has been paid. I have come across two companies that will actually review the medical bills post-payment. This may be an area that will gain in popularity over the next few months.

The reserve part of the formula is negotiable. If you renew on January 1, you should be in the last phase of reserve negotiation, not the very first. One area that you can help your carrier’s Workers Comp adjusting staff is to not call them out of the blue requesting a claims review.

The girl Workers Comp Dates was accident

Wikimedia commons – Alexisrael

This can be a recipe for disaster as you may cause increases in files that you are actually trying to have reduced by the deadline date. Your company knows what is occurring with each employee much better than the adjusters. Updating them with timely information is important. You, as the employer, are basically their eyes and ears.

The updates will help your company establish a working relationship with your carrier’s Workers Comp claims department. This will let them know about your company’s:

Medical treatment network
Return to work program
Timely first report of injury filing
How your company treats injured employees

An insured’s reputation is very important as the adjusting staff will know your reputation for handling your Workers Comp claims. This can save you a large amount of premium in the long run.

If you wish to have your reserves analyzed for your upcoming policy, you would need to likely bring in an expert ASAP. If your company does not renew January 1, please email ([email protected]) or call us, and we will provide you with the date that your reserves will apply to your next policy.

If your carrier wishes to have a claims review with you just before your renewal date, that is a grand waste of time if you are aiming to reduce your reserves for your next policy.

Self Insureds

For most self-insureds (especially governmental entities), the renewal date for your TPA contracts is July 1st. Some governmental entities have converted the contracts to January 1 renewal dates.

There is much debate concerning the extensions of TPA contracts in place. Should a self-insured employer:

Just renew the contract with the same TPA by an extension every year
Place the TPA contract out for bidding on a yearly basis
Place the contract out for bidding every three years?

The first two are great ways to lose the TPA’s adjusters that are working on your files. If you company or entity is large enough to have a Workers Comp adjuster working solely on your claims 1/3 time, they will very likely want some stability in their job.

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The first two options will likely cause the TPA’s adjuster to not really be sure if they will have a job from year to year. This instability is why we recommend to bid out the claims services every three years with no extensions.

If your company or organization just keeps renewing your WC claims handling with the same company year after year, you could easily be overpaying for services or not receiving the proper level of service.

If a TPA thinks they will have your business year after year, you may want to shake things up a bit by placing your TPA work out for bid. The bid process becomes a learning experience that is well worth the time spent in the process of possibly finding a more economical and better-fitting TPA among the hundreds in the marketplace.

Voluntary Market (Non self insured)

If your policy renews in June or July, you may want to start organizing your financials for the premium auditor. If you close out your year on July 1, I recommend examining your premium auditor’s letter from last year and gather the same information for this year. This article covers preparing for your Workers Comp premium audit.

As you go through your records for closing out your fiscal year, you will have your hands on the exact data the premium auditor will request.

Making a copy of all the records (paper or electronic) as you come across them will save you double work and will cut down on the stress of closing your year out and the premium audit process.

©J&L Risk Management Inc Copyright Notice

Very Important Upcoming Date For January 1 Policies

June 10, 2011 By JL Risk Management Consultants

Important Upcoming Date For January 1 Policies Renewal

Over the last few months, I had been covering a plan on how to reduce E-Mods. The important upcoming date for January 1 renewals is your Unit Stat date. The Total Incurred (Paid + Reserves) is tallied six months after your policy inception for your NEXT policy period.

Christmas Graphic of Important Upcoming Date January First

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If you have been following my recommended Action Plan, you should have by now

obtained a copy of your loss run (online preferred)
analyzed the loss run for any files that seem over-reserved or should have been closed
contacted your Workers Comp adjuster
negotiated the reserves
obtained an additional loss run to make sure the changes were made

The best way to finish the analysis is to obtain a copy of your loss run the last week of this month. Go over all the Total Incurred figures to make sure they match the negotiated reserves. If the changes were different than expected or were not made, the Total Incurred amounts on your claims are stamped in stone. Usually, after close of business on June 30th, the insurance carriers will not change the values.

The Total Incurred will be reported to the Rating Bureaus using the June 30th amounts. If your policy does not have a January 1 renewal, then just add six months onto your policy inception date for your Unit Stat date. For example if your renewal date is 4/1/11, then your Unit Stat date is 09/30/11.

I will post next time on how to get your E-Mod report months in advance of when it is released.

©J&L Risk Management Inc Copyright Notice

Total Incurred – Two Very Different Definitions – NCCI vs Loss Runs

April 27, 2010 By JL Risk Management Consultants

Total Incurred Means Two Different Things In Two Different Places

The Total Incurred part of claims reserves consists of the indemnity reserve added to medical reserves for reporting to the rate bureaus. The figure does not include ALAE better known as an allocated expense.

Wikimedia Commons – Kelly Bailey

Distinguishing expenses from medical incurred is very critical. The employer should not have ALAE included in their E-Mods.

Therefore, one cannot match the total incurred on the worker’s comp loss runs and on the UNISTAT reports for the rating bureaus.

I have posted on this term previously. It is the sum of the amount paid and the Workers Comp claim reserves. The figures are included in employers’ rating bureau reports. Total Incurred is the most critical part of an employer’s E-Mod.

The insurance carrier or TPA denotes the figure with somewhat differing terms. I have seen it called Total Reserves and a few other terms.

The official definition – which is really the formula Reserves + Paid = Total Incurred. The sum of incurred medical and indemnity benefits and others for lost-time claims is also a definition.

Reserves consist of what the adjuster or claims staff considers the predicted amount that will be paid out over the life of the claim. An efficient adjuster reviews their reserves at least every 60 days and when there is a major file development such as a surgery recommendation by the treating physician; a return to work; or final settlements all as examples.

The paid part of the above equation results in much more difficult reviews known as leakage audits. Leakage audits require a consultant or employee with a heavy financial and adjusting background and usually seven years adjusting experience in their backgrounds.

Next time that you receive a loss run for your company, highlight the column that reads Total Incurred.

©J&L Risk Management Inc Copyright Notice

Why Is The Total Incurred Value So Important For Premiums?

May 26, 2009 By JL Risk Management Consultants

Total Incurred Value Most Important Number

The total incurred value is one of the more confusing areas of Workers Compensation. The terms are different on almost every insurance carrier’s loss runs. The term Total Incurred is the sum of the funds Spent added to the Reserves.

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In other words: Total Incurred = Spent + Reserves. The easiest way to locate the Total Incurred is to find the largest of the reserving amounts on each claim. The Total Incurred will always be the largest number.

The reason that the Total Incurred figure is so important is that is the amount used by insurance carriers to report your insurance loss history to NCCI or your State Rating Bureau. The amount spent is not what is used to calculate your E-Mod. It is the Total Incurred value.

For instance, if you have a Workers Comp claim that has only $300 spent but there are $13,000 in reserves, then the claim is valued at $13,300, not $300. We just received a call today from a company in California that had this very question. The Workers Comp file was left open for three years and they paid premiums off the $13,300 not the $300. A few claims such as this can wreck a Workers Comp program.

Businesswoman Total Incurred With Employees Against Gray Backgroud

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This is a very important point when you look over your company’s Workers Comp loss runs. It is a great idea to make sure the claims adjuster has provided you with an updated status on the Work Comp claim. Workers Comp adjusters are very overloaded with claims, especially with the downsizing occurring due to the recession.

They may not have time to look at reducing reserves. That is the lowest priority in an adjuster’s busy day. The adjuster has about thirteen main tasks and reducing reserves is #13. It is not the individual adjuster’s fault. It is the way Workers Comp claims systems have been operating for many years.

Online claims access remains worth its weight in gold when keeping your Workers Comp program in check. Knowing your up-to-date claims statuses including the associated financial figures helps you monitor your claims much more easily.

If you feel that your files are over-reserved, it may be time to call in a claims professional or a Workers Comp consultant to keep your Workers Compensation premiums in check. We always recommend not calling an adjuster and saying that all your Workers Comp reserves are too high. Emailing an adjuster with specific questions is the best way to follow your claims.

©J&L Risk Management Inc Copyright Notice

How Do Reserves, Total Incurred, and Paid Affect Your Premiums

October 31, 2008 By JL Risk Management Consultants

The Total Incurred Formula Generates Premium Base

The total incurred formula involves three distinct terms.

When I am making a presentation or when I receive email questions about my posts, one of the areas that is often mentioned is the formula on the parts of a Workers Compensation claim.

Vector art style of man on table with formula background Total Incurred Formula

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There are a few modifications or re-wordings by insurance carriers that change the variable names. The formula is : Paid + Outstanding Reserves = Total Incurred.

A quick definition for each of the three terms:

Paid – what has been paid to date on a claim. This does not include anything pending. This number is almost impossible to change as what has been paid on a claim cannot really be altered unless there was a mistake in a payment.
Outstanding Reserves – the projected payouts that have yet to be paid over the life of a Workers Comp claim. The adjuster uses a “rule of thumb” to set the reserves. The reserve figure is totally negotiable as there are no absolute formulas for estimating future payments. This is an opinion of the adjuster.
Total Incurred – The present and future total cost of a claim. This figure feeds into the Experience Modification (E-Mod) formula and can heavily affect your premium. The claims figures on your NCCI(r) or State Bureau come from this figure.

I often hear that only the Paid figure affects the E-Mod. This is not true. The total incurred is the amount that is the starting point for the E-Mod calculation. The most important factor is that the Total Incurred is charged to your E-Mod at least three or more times.

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I have posted many times on how to examine the claims reserves or total incurred. The easiest way to begin is to look at your loss runs. Knowing what to ask about each claim reserve is key. Online access to your claims is golden as you can track what is happening or if you hire an expert, it will save you a large amount of consultant $.

Have a great and safe Halloween.

Total Incurred Definition – Basic But Important Workers Comp Term

April 3, 2008 By JL Risk Management Consultants

Total Incurred Definition Has Two Variables

The Total Incurred definition is the funds that have already been paid out + the Reserves on the file.

Picture of Calculator Total Incurred Bills

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The E-Mod is calculated using Total Incurred as one of the main items. The Paid part can rarely be adjusted. The Reserves, however, can be negotiated.

Update – This is an older article. Leakage audits on concerning the accuracy of the file payments can now be analyzed. We have partnered with two different firms that can provide leakage audit services.

The two parts of the Total Incurred are

Indemnity Payments/Reserves
Medical Payments/Reserves

If you look at your NCCI or Rating Bureau Sheets, you will only see one loss figure. The Total Incurred is the total of the above two bullets.

Insurance carriers and Third Party Administrators sometimes have different labels on the Paid, Reserve, and Total columns. They can be confusing. If you have any questions on your loss runs, you should call your insurance carrier or TPA and ask any questions about your loss run.

There is no standard loss run. No state insurance department or rating bureau requires a certain form for the losses to be reported to the employer.

One of the most important things to remember is that on the loss runs the total incurred is the sum of the Indemnity, Medical, and Expense figures. However, you have to subtract out the expense figure to match it to the Rating Bureau Worksheets.

I wanted to start with the Total Incurred, as I wanted to talk more about the Reserves part of the figure in the next post.

Next Up – Reserves – The Secret Budget Buster

Workers Comp Question From One of Our Blog Readers

November 5, 2007 By JL Risk Management Consultants

Main Workers Comp Question At Presentations and Meetings

A great Workers Comp Question was asked by one of our blog readers. This is a question that we are asked quite often at presentations and at client meetings.

Graphic of Question Marks Workers' Comp Question On Brain

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What is the difference between paid, total incurred, and reserves on our Work Comp loss runs? The way that most carriers and TPA’s define the terms are as follows:

Paid – what was paid on the Workers Compensation file to the date of the loss run. If any large bill or payment was in a pending status, Paid does not include the bill until a check has been cut. THIS IS ONLY PART OF WHAT YOUR EMOD IS CALCULATED FROM YOUR UNIT STAT DATE.
Total Incurred – This is what was paid + the Work Comp reserves on the file. THIS IS WHAT YOUR EMOD IS CALCULATED FROM YOUR UNIT STAT DATE. The Total Incurred on the file includes the reserves.
Reserves – This is the estimated amount the Workers Comp adjuster thinks will be spent on the claim OVER AND ABOVE WHAT HAS BEEN PAID ON THE CLAIM.
PAID + RESERVES = TOTAL INCURRED

Remember that Expenses are included as part of the Total Incurred figure on loss runs.

Rarely do the rating bureaus include ALAE (Allocated Adjustment Expenses) in their Experience Modification Factor calculations.

If you have not heard of some of the terms in this blog, check out https://cutcompcosts.com/ and click on the Definitions Tab.

Check out our next installment – Some misconceptions about Emods and Loss Runs

Your Workers Compensation Budget – Who Really Is In Charge?

August 27, 2007 By JL Risk Management Consultants

Workers Compensation Budget Comes From One Group

Who is in charge of your Workers Compensation budget that is 100% unregulated?

Picture of Workers Compensation Budget Fixing

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Is it your agent, underwriter, premium auditor, or insurance commissioner? No, not any one of those parties, as they are all under some type of regulation. The unregulated part of Workers’ Comp premiums is (drum roll) – your Work Comp insurance adjuster.

There is a long previous posting on Total Incurred. To not bore anyone to tears, I left this part for today. Your insurance adjuster needs to be licensed in most states, but there is no regulation on the reserves/total incurred they set on your WC claims.

What are the guidelines for setting reserves on a WC claim? There are none. As I mentioned in the last post, whatever your total incurred is by the 180th day after your policy period expires is what you pay for your Workers Compensation premiums – plain and simple.

Picture Hand Pointing Workers Compensation Budget Globe

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What do you do immediately to make sure you have no overcharges in your premiums?

Find your monthly or quarterly Workers Comp Loss Run from your insurance carrier and review it.
If you do not have one, request it ASAP.
Make sure that all claims that should be closed are closed.
If a total incurred or reserves look very large for the claim, email your adjuster.
Do you know who the adjuster is on every one of your claims?
Do you have a working relationship with that adjuster?
Do you have their email address?
If you feel you need further help, consult with a claims expert- we are claims and premium consultants. Please excuse the J&L Risk Mgmt ad.

If you answered No to #4 – #6, are you just writing checks to the agent or carrier? There is no need to just think of Workers’ Compensation as a fixed cost to doing business. There are more areas to reduce your premium, but this is the one that costs your company’s workers compensation budget the most.