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Are you an exceptional workers' compensation adjuster?

Byline: Brian V. Francis

Claims adjusting requires a broad base of specialized knowledge. Whether claims practitioners work in the property and casualty or life and health fields, they need to know about law, contracts (policies), medicine, engineering and construction. Workers' compensation adjusters must also maintain an intimate knowledge of medicine including orthopedics, neurology, internal medicine and psychiatry. Additionally, they must have an in-depth knowledge of law and statutory construction, human relations, negotiations, underwriting and a smidgeon of actuarial science, and they must be patient, inquisitive and composed.

Knowledgeable claims adjusters understand that they have a direct impact on the cost of their insured's Workers' Compensation insurance. There are a number of concepts that many exceptional adjusters practice in order to provide accurate and timely claims handling.

1. They consistently refer to and follow prescribed claims management protocols.

Good faith claims management and proper reserving are paramount to the financial success of any workers' compensation program. Good faith claims management is also critical to the fair and equitable application of the workers' compensation statute as it applies to injured employees.

Defined claims management practices and procedures bring continuity and equality to the claims process. Workers' compensation adjusters should consistently refer to their claims management protocols, and insurance regulations in many states require such guidelines. Furthermore, following such protocols becomes a primary defense if allegations of bad faith claims practices arise.

2. They have an in-depth working knowledge of the workers' compensation statute.

The task of the adjuster is to fairly and equitably apply the verbiage and tenets found within the workers' compensation statute. Therefore, it is incumbent upon the adjuster to understand the statute and how it could be interpreted.

The claims adjuster should maintain a paper copy of the statute for easy reference. Many adjusters learn about the statue by word of mouth or from other adjusters and legal counsel. While this is helpful, it cannot replace first-hand knowledge of the statute. An adjuster who is not knowledgeable about the compensation statute will have difficulty applying it in a fair and equitable manner.

Likewise, exceptional claims adjusters understand current case law and how it applies to the management of their portfolio of claims. While not functioning as legal counsel, claim handlers making decisions on behalf of an insured organization should have a working knowledge of statutes and current case law. Such knowledge will complement the legal defense of a claim when the factual scenario suggests that an aggressive posture is indicated.

3. They promptly and accurately formulate and establish reserves.

Properly established reserves can have a positive effect on the insured's Workers' Compensation insurance costs. (The Sarbanes-Oxley Act and other financial regulations require insurers and self-insureds to accurately document their liabilities). In order to promptly and accurately establish reserves, the exceptional adjuster is well-trained, experienced and employs reserving assistance software. He or she is also fluent in the disciplines of law, medical management, claimant psychology and litigation management. Generally, the adjuster's reserving philosophy should encompass the parameters of promptness and accuracy.

4. They utilize reserving assistance.

Workers' Compensation insurance is predicated on historical loss information. There are several commercial databases available that provide information to aid adjusters in determining the length and cost of a disability. Traditionally, the formulation of reserves has always been a subjective process based on the adjuster's medical expertise and experience. This leads to a lack of accuracy and continuity in establishing reserves. Statistical databases bring objective criteria to the reserving process and must be utilized with the subjective attributes of expertise and experience.

One of the more commonly used reserving tools involves evidence-based medical guidelines. Such disability time and loss cost parameters are formulated from a number of medical databases and add considerable objectivity, credibility and consistency to the reserving of claims. State-of-the-art claims departments provide these tools to their workers' compensation adjusting staff.

5. They understand the fundamental components of the experience modification formula.

Knowledgeable adjusters understand that how they manage claims affects their insureds' income statements (P&L) and the cost of their Workers' Compensation insurance. Any incorrect or unrelated payments or inaccurate reserves will unnecessarily increase the cost. Knowing the components and function of the experience modification formula allows adjusters to understand how their actions influence the cost of an insured's insurance.

The simplified experience modification formula is:

The Insured's Actual Incurred Losses (Paid + Reserved)

------------ DIVIDED BY ------------

Their Expected Losses (expected losses are a product of the insured's anticipated payroll and predicated, in part, on the insured's historical loss experience)

6. They understand the concept of net present value.

Adjusters often conclude claims by paying monies that account for future benefits, but a dollar today will not have the same value in future years. Understanding net present value and its future effect on the value of claims will assist the adjuster in formulating a reasonable and fair cost of the claim. While considering the time value of money in the formulation of settlements is an important factor, most insurance companies and insurance regulators do not allow the use of present value or discounting when establishing reserves.

7. They understand the concept of loss development.

Exceptional adjusters understand that the term loss development is associated with the growth or reduction of the loss cost of claims over time. Loss development tracks how well the adjuster reserves files during a specific period. The goal in reserving is to recognize the ultimate cost of the claim as early as possible and maintain that financial posture. Loss development shows how early and accurately the adjuster estimated that liability, and how the claims cost grew or decreased because of uncertainty over the claim's ultimate value. Adhering to the reserving philosophy stated earlier will help refine the loss development curve.

8. They understand the concept of the Incurred But Not Reported loss (IBNR).

The IBNR is an actuarially forecast loss amount based on the adjuster's claim reserves and loss payments. The IBNR mathematically indicates there are claims "out there" that have occurred but have yet to become known or reported. Also included in the IBNR is a factor for insufficient claim reserving (under-reserving) known as the Incurred But Not Enough Reserved (IBNER). Both show up as liabilities on the insurance company's balance sheet or that of the self-insured program. Exceptional adjusters understand that their accuracy in stating claim reserves has a paramount effect on the financial success of the insurance company or self-insured program.

9. They work closely with a loss control specialist and the insured to build a comprehensive workers' compensation risk management program.

Claims management is just another form of loss control because it seeks to control the cost (severity) of the loss. Generally, a loss control specialist seeks to keep the losses from occurring by controlling the frequency of loss. The loss control specialist and the claims management specialist should work in concert to identify the trends in frequency and severity of the insured's accidents.

By physically inspecting working conditions and analyzing historical loss information, these specialists should help the insured identify, prevent and reduce the cost of their claims. Loss control is the cornerstone of any comprehensive insurance program. When the risk management team (loss control and claims) works together, exceptional adjusters understand that the insured's workers' compensation program is being prudently managed.

10. They measure their performance.

The workers' compensation business, like other forms of insurance, is numerically driven. Therefore, tracking performance is relatively easy using spreadsheets and databases. Exceptional adjusters have a number of measurement tools to help them monitor their success in managing claims. A plethora of benchmarks is not indicated, but three or four measuring tools such as average length of time a claim is open, average cost per claim, accuracy of reserving (loss development) and response time to new claims are indicated.

11. They understand the concept of subrogation and its impact.

In workers' compensation, the employer/insurer is the sole entity financially responsible for the employee's work-related loss. Payment is through the workers' compensation statute and claims process. However, if a third party other than the employer or a fellow employee causes the loss, the insurance company may subrogate the loss and sue the negligent (loss causing) party. Exceptional adjusters are cognizant of potential third-party recoveries in any form (e.g., second-injury funds, negligent third parties, reinsurance). They look for subrogation possibilities on every claim they handle.

Workers' compensation adjusting is a discipline that requires a broad base of specialized knowledge because the claims process is sophisticated and complex. Exceptional adjusters are consistently upgrading their specialized knowledge and claim skills. Having a working knowledge of premium development, underwriting, loss control and actuarial science will help adjusters understand the importance of what they do and how it affects the entire insurance process.

Brian Francis ( is a risk manager and litigation consultant in Southfield, Mich.
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Date:Aug 1, 2016
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