Risk Insider: David Hershey

Getting Reserve Analysis Right

By: | May 24, 2016 • 3 min read
David S. Hershey is the Risk Manager for Sprague Operating Resources LLC / Lexa International. He is a 2014 Risk & Insurance Risk All-Star and a 2014 Liberty Mutual Responsibility Leader. He can be reached at [email protected]

For those insureds who carry deductibles or self-insured retentions, the concept of year-end valuations for your known and IBNR financial obligations is not exactly a surprise.

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Actuaries provide risk managers a report that is based on a tried and true formulation (usually very conservative), to determine the expected financial obligation (a combination of short- and long-term liability), that reduces your company’s bottom line along with the other usual and customary business expenses.

The intent of this article is focus on those who may not realize some advance preparation and understanding of how the reserve analysis process works can provide a significant impact on the amount of funds set aside for the payment of current and future (known and unknown), claims expenses.

Let’s consider a workers’ comp example.

The basic approach to calculating the amount of cash needed to fund your claims reserve starts with your loss runs.

If your actuary is unwilling or unable to provide a thorough and understandable explanation of the science and philosophy surrounding your reserve analysis, you may want to consider a new provider.

Your insurer produces loss runs that contain two key figures: incurred and paid loss amounts.

The incurred amount is the insurer’s best estimate as to the eventual cost of the total claim. The paid amount is that portion of the claim which the Insured has already paid and has or will expense during a prior or future period.

The difference between the two (incurred – paid), is the amount of the outstanding reserve or the estimated amount of the claim that remains to be paid (such as continued treatment and future indemnity during the recovery period).

The funds that are of concern in determining the amount of the reserve can be calculated by the following equation: suggested insured reserve amount = insured’s payments per claim + remaining reserve amounts capitated by the insured’s deductible or SIR.

Total outstanding reserve (applying the per claim deductible cap of $500,000), in this example is determined to be $1,950,000.

To calculate the amount of claim money initially needed to be reserved by the insured, each individual claim whose deductible has not already been satisfied, less any amounts paid by the Insured and then summed revealing the minimum amount the insured should be expecting to pay for future claim obligations resulting from the designated policy period.

Claim amounts due in excess of the deductible or SIR will be paid by the insurer and therefore will not impact the insured’s balance sheet or income statement.

The preceding example provides the insured a very basic approach in determining the annual claim reserve adequacy. Actuaries will apply different factors to the initial reserve ($1,950,000), to factor the probability of claim growth due to changes in treatment (as an example) and for inflation. The common terms used to describe these modifications are trending and development.

Trending and development factors can be obtained by individual insured history, broker factors, a ratings agency or from your insurer.

The goal from the perspective of most risk managers is to accurately project future monetary commitments from known and unknown claims without over reserving, the result of which can cause an unnecessary restriction of cash that could be used for other purposes.

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The selection of the factor that is best for you should be a collaborative effort and in most cases is flexible. A lack of attention and understanding of the basic process by which the annual reserve analysis will most likely result in an inefficient use of your company’s capital.

If your actuary is unwilling or unable to provide a thorough and understandable explanation of the science and philosophy surrounding your reserve analysis, you may want to consider a new provider.

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The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | May 24, 2016 • 4 min read
You Be the Judge

Court Sinks Subrogation

On March 17, 2012, the commander, a vessel owned by Nature’s Way Marine, ran aground in the mouth of a narrow channel of the Mississippi River near Crown Point, La., owned and operated by Crown Point Holdings LLC.

R6-16p14_LegalSpotlight.inddAs it maneuvered to free itself, the movements created “extreme wave wash” that broke the mooring lines of two of Crown Point’s vessels, the Port Gibson and the Buccaneer, grounding them on a mud bank.

On March 21, the Port Gibson began to take on water and sank, pulling the Buccaneer down with it. After raising the ships, it was discovered Port Gibson’s hull was punctured by a bolt-studded piece of timber.

Osprey Underwriting Agency Ltd., which issued Crown Point marine hull insurance on the Port Gibson and the Buccaneer, paid for salvage and damage expenses and then, as subrogee, it sued Nature’s Way for reimbursement, arguing the Commander’s maneuvers caused the sinking of Crown Point’s vessels.

A district court in Louisiana ruled against Osprey. It said Osprey failed to prove the Commander’s actions caused the sinking, and even if the causation could be determined, Crown Point’s failure to warn anyone of the timber impaled in the hull was a superseding cause of the sinking.

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On March 25, the U.S. 5th Circuit Court of Appeals upheld that decision. It concluded that experts from both sides “vehemently” disagreed with how the hull impalement occurred, and that marine law required negligence to be a “substantial factor” in the damage.

Scorecard: Osprey will not be reimbursed for its costs to salvage and repair the vessels.

Takeaway: Under general maritime law, “negligence must be a ‘substantial factor’ in the injury.”

Legal Fees Contested

On Dec. 29, 2011, William R. Kowalski and Hawaii International Seafood filed suit against Anova Food LLC, claiming patent infringement and false advertising. The lawsuit accused Anova of using Kowalski’s “tasteless smoke” process to treat tuna, although Anova advertised the fish were treated by a “clearsmoke” process.

Anova retained Gary Grimmer as local counsel in Hawaii to represent it.

On Oct. 12, 2012, Anova requested a defense from the Hanover Insurance Co. and its subsidiary, Massachusetts Bay Insurance Co. (“Hanover”). Defense was granted under a reservation of rights, and the insurer agreed to pay Grimmer in accordance with its litigation guidelines and fees.

Hanover’s claim that it only agreed to hire Grimmer and not Zobrist conflicted with its payment of some of Zobrist’s legal fees, the court ruled.

Hanover stated it would not pay, however, for any fees paid by Anova prior to the claim being made.

The insurer said it would not apply the exclusion for injuries “arising out of” infringement of intellectual property, but would not indemnify Anova for any punitive damages.

On Dec. 11, 2012, the Zobrist law firm, which had a history with Anova’s intellectual property issues, filed its appearance as counsel of record for Anova, and was subsequently paid $284,624 by Hanover.

A year later, Hanover informed Anova it was transferring defense in the case from Grimmer to two other attorneys. At that time, it said that any continued involvement by Zobrist “will need to be funded directly” by Anova.

On June 19, 2014, Hanover asked for a court determination that it need not defend nor indemnify Anova. The insured filed a counterclaim for breach of contract and bad faith, arguing Hanover owed it a defense, and the unpaid balance to Zobrist of $385,153.

Anova reached a settlement with Kowalski in April 2015.

The U.S. District Court for the District of Hawaii ruled on March 24, 2016 that Hanover did have a duty to defend Anova but did not have to pay for legal services prior to Anova’s request for a defense.

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Because factual questions remained about the legal fees paid to Zobrist, the court denied Anova’s motion for summary judgment on its claim that Hanover breached its contract.

Scorecard: Additional court proceedings will determine whether Hanover must pay $385,153 for Zobrist’s legal fees.

Takeaway: Hanover’s claim that it only agreed to hire Grimmer and not Zobrist conflicted with its payment of some of Zobrist’s legal fees, the court ruled.

Request for Defense Denied

In 2009, Larry Naquin was using a land crane owned by Elevating Boats LLC (EBI) to move a “test block” when the welding holding the crane to its base failed.

Naquin jumped from the crane house, breaking both feet and sustaining a lower abdominal hernia. He was never able to return to physical work.

R6-16p14_LegalSpotlight.inddIn May 2012, a federal jury in Louisiana awarded Naquin $2.4 million for physical and emotional pain and lost wages. EBI appealed and the negligence verdict was upheld.

Subsequently, EBI sued State National Insurance Co. and London insurers, accusing them of breaching their contracts by denying EBI’s request for defense and indemnification.

On March 22, the U.S. 5th Circuit Court of Appeals agreed with a lower court in dismissing EBI’s lawsuit.

Scorecard: The insurers are not responsible for indemnifying EBI.

Takeaway: EBI’s policy offered indemnity for the company “as owner of the Vessel,” and it was not triggered because the accident occurred on land. &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Sponsored Content by CorVel

Advocacy: The Impact of Continuous Triage

Claims management is never stagnant. Utilizing a continuous triage model keeps injured employees on track to recovery.
By: | May 4, 2016 • 6 min read

SponsoredContent_CorVel

Introduction

In the world of workers’ compensation, timing is everything. Many studies have shown that the earlier a workplace incident or injury is acted upon, the more successful the results*. However, there is further evidence indicating there is even more of an impact seen when a claim is not only filed promptly, but also effective triage is conducted and management of the claim takes place consistently through closure.

Typically, every program incorporates a form of early intervention. But then what? While it is common knowledge that early claims reporting and medical treatment are the most critical parts of a claim, if left alone after management, an injured worker could – and often does – fall through the cracks.

All Claims Paths are Not Created Equal

Even with early intervention and the best intentions of the adjuster, things can still go wrong. What if we could follow one injury down two paths, resulting in two entirely different outcomes? This case study illustrates the difference between two claims management processes – one of proactive, continuous claims triage and one of inactivity after initial intervention – and the impact, or lack thereof, it can have on the outcome of a claim. By addressing all indicators, effective triage can drastically change the trajectory of a claim.

The Injury

While working at a factory, David, a 40-year-old employee, experienced sudden shoulder pain while lifting a heavy box. He reported the incident to his supervisor, who contacted their 24/7 triage call center to report the incident. After speaking with a triage nurse, the nurse recommended he go to an occupational medicine clinic for further evaluation, based on his self-reported symptoms of significant swelling, a lack of range of motion and a pain level described as greater than “8.”

The physician diagnosed David with a shoulder sprain and prescribed two weeks of rest, ice and prescription strength ibuprofen. He restricted David from any lifting over his head.

By all accounts, early intervention was working. Utilizing 24/7 nurse triage, there was no lag time between the incident and care. David received timely medical attention and had a treatment plan in place within one day.

But Wait…

A critical factor in any program is a return to work date, yet David was not given a return to work date from the physician at the occupational medicine clinic; therefore, no date was entered in the system.

One small, crucial detail needs just as much attention as when an incident is initially reported. What happens the third week of a claim is just as important as what happens on the day the injury occurs. Involvement with a claim must take place through claim closure and not just at initial triage.

The Same Old Story

After three weeks of physical therapy, no further medical interventions and a lack of communication from his adjuster, David returned to his physician complaining of continued pain. The physician encouraged him to continue physical therapy to improve his mobility and added an opioid prescription to help with his pain.

At home, with no return to work in sight, David became depressed and continued to experience pain in his shoulder. He scheduled an appointment with the physician months later, stating physical therapy was not helping. Since David’s pain had not subsided, the physician ordered an MRI, which came back negative, and wrote David a prescription for medication to manage his depression. The physician referred him to an orthopedic specialist and wrote him a new prescription for additional opioids to address his pain…

Costly medical interventions continued to accrue for the employer and the surmounting risk of the claim continued to go unmanaged. His claim was much more severe than anyone knew.

What if his injury had been managed?

A Model Example

Using a claims system that incorporated a predictive modeling rules engine, the adjuster was immediately prompted to retrieve a return to work date from the physician. Therefore, David’s file was flagged and submitted for a further level of nurse triage intervention and validation. A nurse contacted the physician and verified that there was no return to work date listed on the medical file because the physician’s initial assessment restricted David to no lifting.

As a result of these triage validations, further interventions were needed and a telephonic case manager was assigned to help coordinate care and pursue a proactive return to work plan. Working with the physical therapist and treating physician resulted in a change in David’s medication and a modified physical therapy regimen.

After a few weeks, David reported an improvement in his mobility and his pain level was a “3,” thus prompting the case manager’s request for a re-evaluation. After his assessment, the physician lifted the restriction, allowing David to lift 10 pounds overhead. With this revision, David was able to return to work at modified duty right away. Within six weeks he returned to full duty.

With access to all of the David’s data and a rules engine to keep adjusters on top of the claim, the medical interventions that were needed for his recovery were validated, therefore effectively managing his recovery by continuing to triage his claim. By coordinating care plans with the physician and the physical therapist, and involving a case manager early on, the active management of David’s claim enabled him to remain engaged in his recovery. There was no lapse in communication, treatment or activity.

CorVel’s Model

After 24/7 nurse triage is conducted and an injured worker receives initial care, CorVel’s claims system, CareMC, conducts continuous triage of all data points collected at claim inception and throughout the life of a claim utilizing its integrated rules engine. Predictive indicators send alerts to prompt the adjuster to take action when needed until the claim is closed ­– not just at the beginning of the claim.

This predictive modeling tool flags potentially complex claims with the risk for high exposure, marking claims that need intervention so that CorVel can assign appropriate resources to mitigate risk.

Claims triage is constant – that is the necessary model. Even on an adjuster’s best day, humans aren’t perfect. A rules engine helps flag things that people can miss. A combination of predictive systems and human intervention ensures claims management is never stagnant – that there is no lapse in communication, activity or treatment. With an advocacy team in the form of an adjuster empowered by a powerful rules engine and a case manager looking out for the best care, injured employees remain engaged in their recovery. By perpetuating patient advocacy, continuous triage reduces claim severity and improves claim outcomes, returning injured workers to the workforce and reducing payors’ risk.

*WCRI.

This article was produced by CorVel Corporation and not the Risk & Insurance® editorial team.



CorVel is a national provider of risk management solutions for employers, third party administrators, insurance companies and government agencies seeking to control costs and promote positive outcomes.
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