Recently two well-known rating agencies (Moody's and Fitch) promulgated opinions that in the property/ casualty area (which includes workers' compensation), prior year reserve takedowns will be greater than reserve additions during the same period. In light of historical industry difficulties with proper case reserving, that is interesting speculation.
Of course, there were solid reasons that the prognostication was articulated. Losses from 2003 to 2008 appear to have actually been somewhat over-reserved, and reserve reductions from these claims in 2013 should exceed whatever strengthening is processed for accident years 2010 and 2011. Before any celebration begins, Moody's admonished that accurate reserve margins are thinnest for workers' comp (followed by commercial auto liability).
The reserve adequacy margins in workers' comp have always been a topic of concern in the industry. It continues to be so even in the face of rating agency estimates that property/casualty cases are over reserved to some extent. What makes the workers' comp arena so much of an aberration? There are a number of reasons:
* This line of business represents the largest portion of the U.S. property/casualty industry's net reserves (in excess of 20 percent).
* Workers' comp is the second most long-tailed line in the industry (behind toxic tort).
* It is statutory and the most heavily legislated line of insurance.
* Annual medical inflation is especially difficult to take into consideration when establishing medical reserves years into the future.
* Case law often widens the scope of coverage.
* Indemnity benefits change on an annual basis.
* New and costly medical conditions are manifested.
* The Medicare Secondary Payer law has been a constant source of concern relative to medical reserving.
If all that isn't enough, there seems to be an immutable difficulty for many workers' comp claims professionals to timely translate factual developments into financial consequences.
Reserve adequacy is clearly pivotal, but the cycles continue to display volatility, which is an actuarial nightmare. If there is an absence of volatility, IBNR reserve strengthening over an entire book of claims can be an alembic. However, when reserve deficiencies are all over the board on a year-to-year basis, this avenue of potential remedy is fraught with peril.
Technology (such as the Micro Insurance Reserve Analysis system) is available to assist carriers, but that is not a substitute for driving reserve accuracy on a file-by-file basis. The only real way to address the reserving problem is on a granular level within each adjuster's inventory. Of course, this is also the most difficult path to follow for obvious reasons.
In claims, nothing is mutually exclusive. It is virtually impossible to have an accurate reserve without a detailed investigation as well as an accurate medical picture of the injury, anticipated treatment regimen, expected length of disability, and permanent residuals (if any). Yet amassing this data in current form on each claim appears to be insurmountable in some claim organizations, in many instances due to high adjuster turnover, extreme case inventories, absent supervision and a lack of training to desired standards.
It is all well and good to establish a reserving standard of, say, probable ultimate cost on each case as early as possible in the life of each file. But achieving that objective is another thing altogether. Whatever standard is established must be properly supported by training, supervision and claims performance evaluations.
Training seems to go in and out of vogue based on the financial performance of organizations. When the bottom line is flush, the training department flourishes and seminars on proper reserving are rife. However when profits dissolve or are thin, the trainers are usually in the first wave of those chosen to be fired in order to trim expenses.
Supervision is another key component of reserving success. However, let's speculate on a real world scenario. A claims supervisor has five adjusters reporting to him/her, each with 150 claims (in some cases, this will be low by 25 to 50 files an adjuster). That's 750 total files in inventory. Usually, a supervisor should see each active claim once every three to four months (and more for the ones on active pay status and open ended disability). Four months yields about 80 work days (20 per month on average). That leaves about nine to 10 files a day (12-13 daily if the supervisor is to review the inventory every three months instead of four) that should be reviewed on diary by that supervisor. That doesn't sound like a lot until you add in daily new case assignments, calls that must be taken, special projects that have to be completed, meetings that must be attended, emails that have to be answered, etc. Carefully reviewing each case and adding probative supervisory instruction becomes most difficult.
Claims performance evaluations (audits) are an integral part of quality assurance relative to reserve adequacy and accuracy. However, this is another area that is often eviscerated when financial objectives aren't met. Travel is often proscribed, and audits diminished based on the need to reduce unallocated expenses. As a result, reserve deficiency trends are slower to be discovered and ameliorated.
The overall property/casualty trend of anticipated reserve reductions in 2013 may somewhat surprise industry analysts, but the workers' comp line continues to skate on thin ice relative to reserve adequacy. There is no easy solution to a historically difficult problem, but ignoring it or trying to address it purely with technology while ignoring the human factor, will not work.
January 10, 2013
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