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.