Once they’ve paid their annual premium, many employers pay scant attention to their workers’ comp policy until the renewal date starts closing in. Unfortunately, that’s not the best time to attempt to control costs.
Because workers’ comp is one of the most loss-sensitive insurance policies, and as claims can sometimes be paid out for decades, it’s incumbent on you to proactively manage claims. One way to do that is through a quarterly claims review process, the timing of which is in line with the calculation of your company’s Experience Modification Factor (X-Mod), which is the one factor you can control to reduce premiums.
It’s important to review loss runs and assess all open claims three months into the new policy year, because the critical number crunching for calculating the X-Mod takes place six months after the policy anniversary date. This gives you three months to reduce or close claims that will affect the X-Mod calculation.
Policies that renewed on Jan. 1, 2014 used the loss experience from policies that were effective from 1/1/10 to 2/31/10; from 1/1/11 to 12/31/11; and from 1/1/12 to 12/31/12. In other words, it looks at the claims from four years ago to one year prior. It will not include the most recent year’s claims payouts, as they are still too fresh.
This is when it’s time to focus on trying to close claims and reducing reserves on existing claims. The top priority is getting the injured employees back to full or modified duty. If that isn’t possible and return to work appears unlikely, then consideration should be given to settling the claim.
Six months after policy inception is the most important day of the workers’ comp year, because this is when the insurance company sends loss information to the rating bureau to be used in the calculation of your X-Mod. This is known as the valuation date, or sometimes, the unit stat date.
This information includes not only the money that the insurance company has spent on claims, but also what it expects to spend (the reserves). In effect, your insurer takes a snapshot of your loss information and it is absolutely critical that these numbers be correct. With few exceptions, once the bureau has the numbers, they are set in stone.
Unfortunately, the numbers are often inaccurate because gauging claims costs is not an exact science. Also, errors are rampart in the system and, once an insurer sets reserves for a claim, it is hard to get them reduced until after the claim closes.
The window of opportunity is short and the process of correcting mistakes can take time, which is another reason for the comprehensive review three months after the policy’s inception.
Put reserves in focus
Pay close attention to reserves. The reserves represent what the insurance company thinks the ultimate cost of the claim will be. It is not a guess, but it is more of an art than a science. Its accuracy depends on the precision of the adjuster in evaluating the employee’s medical condition, anticipated time away from work, cost of medical care and other relevant costs.
Yet, the cost projections get counted exactly the same as the dollars paid out, so if the reserve is set too high, you will pay too much.
Although the X-Mod is set at the sixth-month mark, it is a good idea to continue the quarterly review process at nine months. Throughout the year, proactive management of all open claims will ensure that there are no surprises at renewal.
