Claim reserve adjustments are just another part of the overall effect claims have on a workers comp policy. They can have a good or bad effect on a policy. It depends if the adjustment is a decrease or increase. In this post I’ll talk about reserve adjustments, what they are and how they effect an employers policy.
When a workers comp claim occurs one of the first things an insurance company does is to establish what it believes will be the ultimate cost of the claim. They do this by calling upon their experience and history of payments for the type of injury incurred. This is called reserving. The purpose of establishing a claim reserve is to set aside, at least from an insurance company accounting stand point, dollars to pay or service a claim. Even though they never really do set aside actual dollars. It’s an accounting function.
Insurance company reserving practices are scrutinized by state departments of insurance, regulatory authorities and other financial reviewers because they make such a great impact on the financial stability of an insurance company’s health. Over-reserving, setting high reserves, and under-reserving, setting low reserves, will have oposite effects on the financial status of a company.
Think of a two column accounting spreadsheet. In the first column is the reserve amount. In the other column is the actual paid claim dollars. Once the reserve is set every claim dollar paid out will then reduce the remaining reserve amount. As the claim progresses and more bills are paid the reserve balance declines.
From an employers point of view, reserves and paid dollars added together are used to develop experience rating factors that may apply to the employers workers compensation policy. Reserves are treated just like paid out dollars.
From an experience rating point of view, reserves have a direct impact on an employers experience modification rate. Remember, claims both paid and reserved, are a big part of the experience rating formula and show up in the factor applied to an employers premium to arrive at the modified premium or what the employer actually pays!
Workers compensation claims can have a long tail. That is, it may be many years before the claim is finally settled and closed. So a claim that remains open always has the potential of having its reserve adjusted in some manner.
A reserve may be adjusted higher or lower depending on circumstances surrounding the claim.
Why do adjustments happen?
- New information has developed since the injury was first reported;
- The injury was not as severe as first anticipated;
- The injury was more severe than first anticipated;
- A law suit has been filed;
- More medical attention is required;
- And others…
What’s the effect on an employer when a reserve adjustment is not made? It depends. If a reduction in reserve should have been processed but was not, the employer will pay higher premiums, because of the effect the claim reserve has on his experience rating. It will have the same effect if a reserve is adjusted higher.
Because of the long tail nature of a workers comp claim, you will sometimes find that an over reserved claim has had a negative impact on an employers experience rating only to be discovered after the claim is settled. Many times this occurs when the claim is settled beyond the experience period. Experience periods are generally a three year look back period begining the previous year. Once a claim has fallen off the experience period reserve adjustments will have no effect on the experience rating.
So, workers compensation reserve adjustments can be good or bad and just another reason all employers should be kept in the loop when it comes to claims!
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Hope this helps you out!
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