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There is no denying that workers’ compensation is complex. When choosing a carrier, it is imperative that businesses evaluate a number of factors…not just simply choose based on the premium costs. Two factors that are often overlooked are how carriers historically handle claims and their reserving practices.

Why Reserves Matter

When a claim is filed on a business’ workers’ compensation policy, the insurance carrier sets aside a specified amount of money to pay the cost of the claim. This sum of money is commonly referred to as the reserves. The reserve amount considers the cost of medical treatment, loss of wages, the potential permanency amount and litigation for each claim. The amount of the reserves for each claim is decided by the carrier and the claims adjuster. The more severe the injury, the larger an employer should expect the reserve to be.

It is in the best interest of the employer for the reserve amount to be as accurate as possible. It is difficult if not impossible in some cases to predict what a claim will ultimately close out at in the beginning of the process. However, it is important to understand a carrier’s reserving philosophy in general and take this into account in the decision-making process.

There are many carriers who would rather set reserves at a maximum level for a given injury and then hopefully close workers’ compensation claims at lower amounts as they do not want to adjust their reserves upwards if the claim worsens over time as it obviously has a negative impact on their financial results. There are others who base reserves on the average or most likely final payout for a particular injury. If a claim worsens and looks like it will close higher than the reserves in place, they will increase the reserve at that point.

Of the two approaches, the maximum reserve approach has the potential for a greater negative impact for an insured. This approach can directly affect the ultimate net cost of their workers’ compensation. As many businesses understand, each policy year and the claims incurred during each year are used to calculate their experience modification for three consecutive years. It is not unusual for more severe claims to stay open for two, three or even four years. If these claims ultimately close at significantly lower amounts, then they will have served to increase the experience modifications and therefore the insured’s premium over the three-year period. Also, the insured’s loss ratio will be higher as a result which will lead to higher rates in addition to the higher experience modification.

Proactive Claims Management

While reserves play a large role in claim servicing, there are other factors that business owners should explore when selecting a carrier for workers’ comp. The quality of a carrier’s claims service is extremely important. One of the most important factors is how quickly the carrier contacts the injured worker. They should help direct their care and make sure they are being treated by the appropriate medical provider. Businesses can help this process by making sure they report all claims as quickly as possible.

It is also very important for the carrier to investigate claims thoroughly in the beginning to determine the cause and source of the loss as well as obtaining the injured employee’s statement and any other witness statements. In some cases, there is potential for recovery against another party if they or their product/tool caused or contributed to the injury. This also helps the employer to identify areas to focus their safety efforts towards to prevent future injuries. 

Lastly, it is very important for the carrier to stay in contact with the employee and the medical provider during the process to make sure the injured employee is progressing in their treatment. The employee is less likely to seek representation from a lawyer following a loss if they know the carrier and the employer care about their recovery. Lack of attorney involvement will help keep the claim at a lower amount and will get the employee back to work sooner.

While it can be tempting for a business to simply choose a workers’ compensation carrier based solely on upfront cost, it could wind up costing a lot more in the long run if these two factors are not taken into consideration, especially for larger companies or those who incur five to 10 workers’ compensation claims a year.

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