How Workers' Compensation Claims Reserves Are Set
It's in your interest to make sure reserves are set as accurately as possible.
When a workers' compensation claim is filed with an insurance company or third-party administrator, the claims professional will try to establish the eventual cost to pay all expenses related to the claim. This is not only prudent business practice but required under insurance state and federal regulations, including the Sarbanes-Oxley Act of 2002.
In most situations most of the detail involving costs, such as medical, indemnity payments and legal expenses, if any, will not be available at the time the claim is submitted.
Nevertheless, a figure must be determined. There are two primary approaches to this. One (the "guesstimate") is based on previous similar claims. The second involves making a statistical reserve based on the average cost of all previous claims. Regardless of what the initial reserve is or how it was determined, claims examiners will regularly revisit the reserve and revise it based on information obtained about actual or reliable estimates of the actual costs.
For each claim the claims professional will set up a reserve worksheet where costs are itemized in three categories — medical, indemnity and expense (some insurers and TPAs break the expense category into legal expenses and non-legal expenses).
To establish the medical reserve, the claims professional will analyze reports to determine an estimate of the cost in the following sub-categories:
- Diagnostic Testing
- Physical Therapy / Occupational Therapy
- Transportation (to/from medical care)
- Attendant Care
Most work comp claims will not require an estimated amount in every medical reserve category.
To establish the indemnity reserve, the claims professional will analyze the medical reports and discuss with the employer possible modified duty options to get an informed estimate of the claim cost in these sub-categories:
- Temporary Total Disability
- Temporary Partial Disability
- Permanent Partial Disability
- Permanent Total Disability
- Vocational Rehabilitation
- Death Benefits
- Dependent Benefits
Seldom will the claims professional have a dollar amount of reserves in every indemnity category. Most files will have reserves in only two or three of the indemnity sub-categories. For example, one case file might include only reserve amounts for temporary total disability and permanent partial disability, while another file might show only the category of death benefits completed.
Expense reserve sub-categories include:
- Defense Attorneys
- Court Costs
- Court Reporters
- State Filing Fees
- Peer Reviews (some insurers and TPAs put this in the medical reserve)
- Independent Medical Examinations (some insurers and TPAs put this in the medical reserve)
- Medical Reports (some insurers and TPAs put this in the medical reserve)
- Medical Management Cost (medical fee schedule reviews, nurse case managers, triage nurses, etc.)
- Any Other Expense
Completing the Reserve Worksheet
To calculate the total reserve for the workers' compensation claim, the dollar amounts for medical, indemnity and expenses are combined.
But adding up the result on the reserve worksheet is the final step for reserving the claim. As new medical information or legal information becomes available that changes the medical prognosis, extent of the indemnity payment or the legal responsibility on the claim, the claims professional will review the reserves in all categories and make the necessary corrections, increasing or decreasing the reserve amount.
Goal: Make Claim Reserves Match Final Settlement
As attorney Rebecca A. Shafer points out in her workbook, Workers’ compensation Management: How to Reduce Costs 20% – 50%, "The goal of reserving is to have the ultimate (final) value of the claim stated as soon as practical, with the understanding that the ultimate value of the claim is subject to change."
Rarely will the amount set for the total reserve and the final amount paid be the same when the claim file is closed. However, the goal of the claims professional is to strive to constantly ascertain as accurately as possible what the final settlement amount will be. It's an ongoing task that requires consistent, conscientious updating.
"Accurate reserving of the claim file is very important to the employer," says Shafer. "If the claim file reserves are too high, the dollar amounts the underwriter uses to calculate future insurance premiums are overstated causing the insurance premiums to be higher than it should be. When the reserves are set too low, an upward adjustment in the reserve amount has to be made in order to pay the correct amount when the claim is settled/concluded."
It's important to monitor your reserve adjustments. If your loss runs reflect large reserve adjustments of 10% or more to the total claim reserve, either up or down at the time of the claim conclusion, you should ask your insurer or third-party administrator to provide details. It's in your interest to make sure reserves are set as accurately as possible.
If you have questions about your workers' compensation reserves, please contact us.
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In this issue:
Top Causes of Loss in the U.S. and the World
How to Protect Your Interests When Working with Contractors
How Workers' Compensation Claims Reserves Are Set
Meet Your Insurance Professional: Claims Examiner