This is Part 4 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent; Part 2 A Basic Review of Claim Losses, the Building Blocks of Experience Rating and Part 3 Primary and Excess Losses: Big Changes Beginning in 2013. Part 5 will be posted later this week.
Did you know that a well-managed program aimed at assuring a low experience modification can produce a significant competitive advantage? In the following section, we will show you why and how.
Previously, we discussed the disproportionate impact that frequency has on an employer’s workers’ compensation premiums. The first $5,000 – soon to be $10,000 and higher – of each claim (primary losses) is counted dollar for dollar in the calculation of the experience modification. Losses above the primary level are discounted substantially. Therefore, a lot of small claims can raise premiums faster than a single large claim. Once again, for an excellent overview of experience rating, we recommend the National Council on Compensation Insurance’s (NCCI) white paper.
When are the numbers actually crunched to determine an employer’s experience mod and, ultimately, the policy year premium? Do employers have to obsess about reserves throughout the policy year or is there an optimal time to review losses?
When it comes to determining the experience rating for the next policy year, there is only one day that really counts. About six months after the end of the policy year, the insurer will prepare and submit a summary of losses spanning the prior three years (called the “unit statistical report”) to NCCI or the appropriate state 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 and strategy for closure of each open claim. If an employer does not have access to its loss run online, a program deficiency, in our view, then the agent or broker should be tasked with getting it.
When Should you Review Losses?
So when should employers review open claims? Large employers will be doing this pretty continuously, but employers at or below the mid-level of the middle market in premium size are different. Here’s a suggestion: If your company has more than a half dozen open claims, you should review the losses at least quarterly. Get a loss run. Schedule a conference call with your claims adjuster and discuss each open claim to make sure that you have a clear and effective strategy to achieve closure.
NOTE: If there are open claims, you should be working steadily throughout the year with your adjuster to return any injured employee to full or modified duty. If, due to the severity of the injury, return to work appears unlikely, you should work toward closure by settling the claim. In the world of insurance, “the only good claim is a closed claim.” A quarterly review process ensures that you have an appropriate focus on every open claim.
For employers with few open claims, quarterly reviews are usually not necessary, although being actively involved with your claim adjuster in the management of each open claim is essential. At a minimum, request a loss run three months after the end of the policy year. This gives you plenty of time to review the status of any open claims and take action toward resolution before the unit stat review is submitted. Three months into your new policy, you have fully three months to impact reserves on old claims prior to the submission of that all-important unit stat report. Once that report is submitted, the numbers can only be changed if there is a clerical error.
The Bottom Line
Educated employers and managers don’t spend every waking moment worrying 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 an alert in your calendar to review your loss runs. You will be taking action just ahead of that one crucial moment when reserves really count.
Even more important than all of this is a vigorous, aggressive and continuous procedure to bring injured workers back to work as soon as possible following injury, if not to full duty, then at least to modified duty. Pursuing this goal is the surest way to keep the cost of losses at an absolute minimum and experience modification at its actuarially lowest level.
That’s a true competitive advantage!

This is Part 2 in 5 part series on Experience Rating changes. See Part 1: The Experience Rating Process: Significant Changes Are Imminent. Parts 3 to 5 will be posted after the holidays.
When you report a claim to your insurance carrier where outside medical bills are involved, the insurer will estimate the ultimate cost of the claim. For medical-only claims, the estimate is small; for lost time claims, it might range anywhere from a few thousand to hundreds of thousands of dollars, depending upon the severity and duration of the injury.
Your company’s claim losses are described in detail on a loss run, a written summary available through your agent or directly from your insurance company. The loss run lists what has already been paid plus what is projected for payment over the life of the claim. The projected, but as yet unpaid, amount is called the “reserve,” because it’s the amount set aside, or reserved, for future payments. The amount already paid plus the reserved amount is called the “total incurred amount.”
Example: John Doe injured his back one year ago:

Paid at the time of the loss run: $ 45,600
Reserved for future payments: $ 60,000
Total Incurred amount: $105,600

Reserves are based on the insurance claim adjuster’s investigation into the nature of the injury (diagnosis and prognosis) and the insurer’s experience with similar cases. The total incurred amount is the insurer’s best estimate of the ultimate cost of the claim: the expected payments for lost wages (indemnity), medical treatment, disability and nurse case management, rehabilitation, attorney fees and other related expenses over the duration of the claim.
The same injury to two workers might result in very different reserves. Among the factors included in setting reserves are:

• Education level
• Co-morbidities (medical problems which may impact recovery such as high blood pressure, diabetes, obesity, drug addiction, etc)
• Age (younger workers generally heal faster than older workers)
• Transferable skills (if unable to return to the original work, whether the injured worker has marketable skills)

The initial reserve is usually posted within 30 days. Once posted, reserves are periodically updated to reflect any changes in the course of the claim. The costs of a projected settlement are usually included in the reserve.
In terms of experience rating, whether a claim is medical-only or indemnity means a lot. Why? Because, with the exception of Massachusetts, medical only claims are discounted by 70% in the experience rating calculation (Massachusetts, a non-NCCI state with its own Rating Bureau, does not discount medical-only claims). However, once any indemnity payments are incurred, there is no discount for any medical costs already paid or projected to be paid, and the loss, up to its first $5,000 counts full value in experience rating. This first $5,000, the “split point,” is called Primary Loss, and it, as well as Excess Loss, all dollars above $5,000, is the subject of our next post. In it we address the imminent and upward change in the split point.