Claims and Risk Management

Claims and Risk Management

Despite best efforts and practices, workers’ compensation claims occur for most companies. From an insurance standpoint, knowing that your company and your employees are protected through fair claims resolutions offers peace of mind. In this article, we focus on how reserves are set for a claim, and the best way to ensure that the reserve and claim resolution is fair and accurate. If under- or over-reserved, negative financial implications for both the company and its insurer occur.

How Reserves are Set

In theory, reserves are set at what is the most likely outcome of a claim based on the facts available and an adjuster’s experience and judgment. However, the process can be highly subjective and without an active, vocal advocate involved in the claim management process, unchecked claims and reserves can be hugely detrimental to a company’s insurance costs.

Reserves play into a company’s Experience Modification factor (ex-mod), the mathematical expression of an individual company’s loss compared to that of other companies within the same industry and of a similar payroll size. The ex-mod is based over a company’s three-year period, so keep in mind that one year of high losses will negatively impact a company’s ex-mod for three subsequent years. If there are larger claims than the expected loss claims, premiums will rise as well as a company’s ex-mod. Additionally, if a company’s ex-mod exceeds the accepted threshold, the company may lose the ability to bid on projects, as they are not seen to pass safety indicators.

So, what needs to happen within the reserve-setting and claim-resolution process to protect a company’s ex-mod and keep insurance costs at a fair and accurate level? Routinely reviewing new claims and communicating frequently with an examiner as well as reviewing reserves and seeking reductions when appropriate are integral to the process. With C3 as a broker, a company knows they have a partner and advocate to aggressively investigate and resolve claims in a timely manner. Here are a few caveats C3 underwriters watch for.

1. Adjuster Authority Levels – Authorities are the maximum amount an adjuster is allowed to offer on a claim. Exceeding an authority requires additional justification on the adjuster’s end and therefore, the tendency is to not exceed the authority, but offer up to that amount. However, be wary of reserves just shy of an adjuster’s authority as it may not accurately reflect the claim. And if a reserve is too high, it may result in difficulty substantiating the claim, consequently raising premiums for the policy holding company.

2. Inclusion of all Information – Reserves are typically required to be set a short time after the claim is made. Adjusters may put too much reserve on a claim, and then despite new information coming in, may not adjust the reserve as necessary. It is important to maintain open communication and request a reserve adjustment as additional information warrants.

3. Stair Stepping – Stair Stepping occurs when loss reserves are raised incrementally – like stair steps – to cover the cost of a claim as the expenses are incurred. This goes against adjuster training as they are taught to not move the reserve frequently within the life of a claim and should only do so with a change in the facts. The best estimate of the ultimate cost of a claim should be reflected by the reserve at all times. Otherwise, the insurer assets in regards to a claim are overstated and the liabilities are understated, producing an inaccurate balance sheet.

With all claims, the underlying most important factor is to have frequent and direct communication and involvement throughout the claims process.

What You Can Do to Manage Your Risk

Assessing loss runs to identify trends and take corrective action is the first and most basic step in managing risk as the best claim is one that doesn’t happen in the first place. However, once a claim is made, assess that the reserve makes common sense. Remember that a reserve should reflect the most likely outcome of a claim, not the worst-case scenario.

Secondly, determine if a reserve reflects your ability to accommodate job duty. For instance, if an injured employee receives physical work restrictions – no kneeling, no lifting objects above a certain weight, no using a specific machine, etc. – can you accommodate that employee in a way that adheres to the restrictions of a workers’ compensation claim? If not, your insurance must make payments, driving up the overall cost of the claim, and negatively affecting your experience modification number. However, if your company is able to accommodate duty, the reserve set should reflect your ability to do so.

Also, if you employ independent contractors or workers via a staffing agency, confirm that none of your claims reflect these workers. All staffing agency employees should be properly insured through a valid workers’ compensation policy per their general employment contract with the agency employing them. Otherwise, claims for independent contractors or agency employees will inaccurately raise your ex-mod.

When it comes to risk mitigation and maintaining a low experience modification to protect your company financially, having a partner who is well-versed in claims management is imperative. Frequent and routine communication regarding claims and the accompanying reserves warrants an advocate dedicated to aggressive investigation and follow through. Your business deserves a partner committed to driving your claims to a fair resolution.