The Basics of Experience Rating, Part Two: When Do Losses Really Count?

January 4th, 2005 by

In our previous blog on experience rating, we discussed the disproportionate impact that frequency has on an employer’s workers’ compensation premiums. The first $5,000 of each claim (primary losses) are counted dollar for dollar in the calculation of the “mod.” Losses above $5,000 are discounted substantially. Therefore, a lot of small claims can raise your premiums faster than a single large claim. Once again, for an excellent overview of experience rating, we recommend NCCI’s white paper.
When are the numbers actually crunched to determine an employer’s premium? Do employers have to obsess about reserves throughout the policy year or is there an optimum time to review losses?
When it comes to determining the experience rating for your next policy year, there is only one day that really counts. About six months after the end of your policy year, a summary of your losses (the unit stat report) is prepared by your insurance carrier(s) and submitted to your rating bureau. For employers with open claims in prior years, it is essential to make sure that the numbers contained in the unit stat report are accurate and reflect an up-to-date understanding of the status of each open claim.
When Should you Look at Losses
So when should an employer review open claims? If your company has more than a half dozen open claims, you should review the losses at least quarterly. Request a loss run from your carrier (your agent can help with this). Go over each open claim with the claim adjuster, to make sure that you have a clear and effective strategy to achieve closure. Ideally, you are working with the adjuster to return the employee to full or modified duty. If, on the other hand, return to work appears unlikely, you should be working toward closure by settling the claim. In the world of insurance, “the only good claim is a closed claim.” This quarterly review process ensures that you have an appropriate focus on every open claim.
For employers with just a handful of open claims, quarterly reviews are usually not necessary. At a minimum, request a loss run three months after the end of your policy year. This gives you plenty of time to review the status of each open claim and take action toward resolution. You have fully three months to impact reserves prior to the submission of that all-important unit stat report.
“Aggravated Inequity”
There may be times when a claim is closed after the unit stat report has already been submitted, but still prior to the beginning of the next policy year. If the claim closes at least 25% below the prior reserved level, you are entitled to a recalculation of your experience rating under the “aggravated inequity” rule. This rule, containing a deliciously inexplicable name, applies only if the claim is closed. If the reserves are reduced but the claim remains open, you are not entitled to a recalculation. All of which brings us back to our primary point: make sure you are comfortable with the reserves three months prior to the submission of the unit stat report.
Savvy managers don’t have to spend every waking moment worried about reserve levels for open claims. There is that one time of year, however, when a laser-like focus on open claims can be very helpful in controlling losses. Make note of your policy end date, move forward three months, and place a post-in in your calendar to review your loss runs. You will be taking action just ahead of that one crucial moment when reserves really count.