Understanding Claim Reserves: A Key Aspect of Workers’ Compensation

Insurers must establish claim reserves when managing workers’ compensation claims within an organization. These reserves serve as designated funds to cover the anticipated costs of such claims. It is essential for insurers and organizations alike to accurately determine and maintain claim reserves to ensure financial stability in the event of workers’ compensation claims. Moreover, insurers are legally obligated to maintain sufficient claim reserves by standards such as the Sarbanes-Oxley Act of 2002.

Developing Claim Reserves

At the outset of a workers’ compensation claim, a claims adjuster assumes the responsibility of estimating the initial allocation for the associated claim reserve. Since this estimate is made early in the claim process, the adjuster often relies on informed estimates to determine the anticipated claim expenses and subsequent reserve amount before the injured or ill employee receives a definitive treatment plan.

Several categories contribute to the estimation of claim expenses, including:

1. Medical Expenses: This category encompasses costs related to the employee’s medical diagnosis and treatment, such as hospital visits, diagnostic tests, specialist care, prescriptions, physical therapy, and transportation for medical purposes.
2. Indemnity Costs: These costs arise from the employee’s ability to return to work, including Permanent Disability, Permanent Partial Disability, Temporary disability, or vocational rehabilitation, Dependent Benefits benefits, and, in tragic cases, death and dependent benefits for the employee’s family.
3. Expense Categories: This encompasses various assumed claim costs, such as legal expenses (e.g., defence attorney fees, court costs, court reports, and state filing fees) and medical management expenses (e.g., charges for triage nurses and case managers).

The claims adjuster relies on the employee’s medical reports and analysis of past claims with similar circumstances to estimate the initial expenses in each category. As new information emerges during the claim process, such as changes in medical prognosis or treatment plans, the adjuster may adjust the reserve amount accordingly. However, the goal is to establish an initial reserve amount that is as accurate as possible, minimizing the need for subsequent adjustments.

Importance of Accurate Claim Reserves

Maintaining accurate claim reserves is paramount, as failure to do so can result in financial implications for both organizations and insurers. Overvalued claim reserves can lead to inflated underwriting calculations and increased organization premium costs. Conversely, undervalued reserves can distort an organization’s financial stability and prolong the duration of open claims, resulting in higher overall expenses.

For insurers, inaccurate claim reserves can contribute to elevated loss ratios and raise concerns about insolvency. Actuaries use Reserve amounts to assess an organization’s risk level and determine appropriate premium rates. Inaccurate reserves can hinder the accuracy of premium calculations and prompt insurers to assume more risk than they can feasibly manage, potentially leading to financial difficulties.

Ensuring Sufficient Claim Reserves

While insurers are primarily responsible for maintaining adequate claim reserves. Organizations can take specific steps to ensure the accuracy of reserves. These include:

Effective Communication

Maintain regular communication with all parties involved in the claim process, including insurers, injured or ill employees, and medical providers. Stay updated on the employee’s medical treatment and anticipated claim expenses. Request closure of the claim once the employee has fully recovered and treatment has concluded, avoiding unnecessarily prolonged open claims.

Routine Reviews

Collaborate with claim representatives to conduct periodic organizational claim reviews. These reviews provide insights into typical claim costs and allow for an analysis of whether past reserve amounts adequately funded associated claims.

Vigilance for Red Flags

Remain attentive to potential issues related to claim reserves throughout the claim process. Look out for claim inconsistencies, stair-stepping concerns (common in long-term claims), and significant reserve changes. These indicators may warrant further investigation or adjustments to reserve amounts.

Claim Inconsistencies

One potential problem occurs when an employee has several upcoming treatment steps, but the claim reserve is nearly depleted. Conversely, an employee may be nearing full recovery while a significant amount of funds remains in the claim reserve. These inconsistencies warrant attention and assessment to align the reserve amount with the anticipated expenses.

Stair-Stepping Concerns

This is more commonly observed in long-term claims spanning one year or more. This issue arises when the claim reserve needs frequent small increments to be raised over time due to inadequate initial reserve planning. It is essential to address this concern to establish a more accurate reserve amount and avoid unnecessary adjustments.

Major Reserve Changes

Significant adjustments to the claim reserve, amounting to 10% or more, can signal a potential problem. Although not always indicative of an issue. Such changes occurring just before claim closure or unrelated to the latest claim information may require further investigation. To ensure accuracy and adherence to the evolving circumstances.

In the event of ongoing claim reserve issues. It may be prudent to seek assistance from an independent auditor as a final resort. Collaborating with an auditor can thoroughly evaluate current reserve practices, leading to corrective measures and guidance where necessary.

Contact Us

For additional workers’ compensation resources and expert assistance. Please do not hesitate to contact the professionals at Advantage Insurance Solutions at 1-877-658-2472.