WORKERS' COMP THOUGHT LEADERSHIP SERIES
Presented by Plethy Recupe
Simple Ideas for a Complex System
Using Your Actuary To Improve Claims Outcomes
by Bill Zachry, SCIF Board Member
Many front-line claims handlers do not understand the actuarial process and as a result, they do not appreciate the impact which the claims administration and reserving processes has on the financials of the insurance company or of self-insured employers. Nor do most claims operations regularly receive targeted actuarial reports from the actuaries. A lack of information keeps them from focusing on the claims which will have the most positive impact on the actuarial outcomes.
Actuaries require accurate and timely information for them to calculate the reserve loss development pattern as well as the ultimate exposure for losses.
Even though management may not always be happy with the results, knowing the correct ultimate exposure is good for the insurance company or the employer.
Due to company silos, processes, or ignorance, most claims operations do not always regularly engage with the actuary process.
Quality and focused claims handling can directly and positively impact the projected actuarial outcomes. Directed information from the actuaries can help focus the claims process to maximize the outcomes from their efforts.
Additionally, many actuaries do not receive timely and accurate claims trending information which would improve the accuracy of their work. This is also because the claims operations do not always appreciate the impact their claims process has on the ultimate outcomes. Without appropriate insight, actuaries make assumptions that may not always result in the most accurate calculations.
Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in insurance, finance and other industries and professions.
Actuaries are professionals who are qualified in this field through intense education and experience and certification.
The actuarial profession was initially developed for insurance companies to help determine the pricing “cost of goods sold” of the insurance product as well as their total exposure of their liabilities(losses). Insurance commissioners require insurance companies to maintain an appropriate ratio of “surplus” (unrestricted assets) to their projected losses to ensure that the insurance companies remain solvent for their investors as well as for the insured customers. Recently, this science has also been used to help determine the need for collateral by insurance companies who sell large deductible programs as well as State governments who have collateral requirements for self-insured employers.
Actuaries do this by developing “loss triangles” out of reserves and claims payments. From these triangles, they determine the best “loss development” factor to use for their employer.
Improved communication between the claims handler and the actuary can provide important information back to the claims handlers on where to focus the claims effort or what information may be helpful for the actuary to do a better job. For instance, when there is an increased focus on settlements, the actuary may only recognize the increase in “paids” and not recognize the impact of a reduced inventory on the reduced long-term fiscal impact of having closed the files. Additionally, the claims handler may not know it is a specific “accident year” which is driving much of the negative results. A re-focus on closing claims from a specific accident year may make a big positive difference on the reserve loss development factors and the resulting collateral requirements.
Reserving practices have a significant impact on the financial health of insurance companies, as well as on employers who retain some workers’ compensation risk. Within some states, the oversight of the reserves and reserving process may differ significantly between the insured claims and self-insured claims. Usually, the State Department of Insurance oversees all insurance company activities including reserving practices. While many states have a dedicated self-insurance department that regulates the reserving and collateral requirements for self-insured companies.
States have specific reserving and claims handling requirements but there are many variables, when applied, which can impact the projected ultimate claims costs. This can be problematic for self-insured companies that have exposure across the United States. For instance, some States allow claims to be administratively closed(when future medical care has been awarded) after two years of inactivity. Other factors impacting reserves can be which “life expectancy table” are used to calculate Life pensions or future medical care. Some states or jurisdictions do not recognize medically reduced life expectancy reports from doctors or allow this information to be factored into the reserves.
Most States oversight bodies do not formally recognize that there can be ongoing medical inflation impacting the reserving process. They only require the medical reserves for calculating the “future medical” cases to be calculated using the recent years average annual expenses times the injured workers’ life expectancy rather than also including an annual inflation multiplier. Some actuaries include a medical inflation rate in their calculations of the calculation of the ultimate loss.
Changes in exposure which may impact actuarial results. Claims handlers have a direct impact on most (not all) of the factors which impact the actuarial projections of the claims.
One of the most important factors for accurate actuarial results is consistency in the reserving practices. This is why the timing of there serve changes and accuracy of the reserves is considered one of the fundamental jobs of the claim’s handlers.
It is important for examiners to recognize when there are potential changes in exposure or claims handling practices and communicate these changes with the employer and the actuary to help avoid surprises.
The first and most important action is to make sure that the data provided to the actuary is consistent (in definition) and timely.
If there is a change of claims administrators, understanding the differences in claims handling practices and reserving philosophy and communicating any differences in practice or definition to the actuary will help avoid surprises from the report.
It is also important to make sure that the data is always collected at the same time. A few days at certain times of the year can make a significant difference in outcomes.
Factors which can change the actuarially predicted outcomes for the employers (development factor):
- When there is a change of claims system (particularly true when changing Claims Administrators) (this is because different systems may have different definitions for opened or closed claims) (some claims operations do not reopen claims to pay minor medical bills after the claim is closed and some do re-open all claims to pay any bills).
- When there is a change of definitions within the claims systems(sometimes if there are changes in the claims systems these changes are not conveyed to the actuary with an adequate explanation of what was changed and why it was changed).
- The definition of a closed claim can be problematic. Some organizations require a re-opening of all claims to pay old bills. Some allow up to $2500 to be paid on a closed claim without re-opening.
- When there is a change of claims handlers. (Either change of TPA or within the TPA).
- When there is a change of settlement philosophy (Stipulations vs C&R).
- When there is a change in the law’s rules or regulations(changing medical cost containment programs from Loss to ULAE).
- When there is a change in the fundamentals of the system (the opioid epidemic).
- When there is a change in the exposure at the employer (new hires, layoffs, implementation of a new safety program,
- When someone “messes” with the claim’s reserves (CFO reducing reserves on the top ten cases in each office by 20%)
- Present value and discount rate. (Some companies state their reserves after using a present value discount rate some do not)
- When the actuarial society puts out a notice (advent of Medicare Set Aside).
- Fraud gambits.
- Changes in IBNR claims, and changes in claims closure patterns
- Calendar year vs accident year (IBNR again)
Prior to the production of the annual actuarial report, there should beat least one meeting between the claims management, the actuary, and the employer to discuss the overall claims handling process, if there have been any changes in potential exposure, and what the claims handlers are doing to mitigate any identified exposures.
If there are any factors that may impact the actuarial outcomes these should be communicated with the actuary.
It is best to attempt to maintain the same actuary to handle your calculations. Frequent changes in actuaries indicated problems in the numbers and raised red flags with oversight administrators and auditors.
Compare your actuary results with the actuary results from your independent auditor. Look for differences as well as similarities.
Ask your actuary for a list of open claims which will have the greatest positive impact if closed within the year.