Many construction contractors are overpaying for their workers’ comp insurance in California — and for reasons that have nothing to do with their company’s premium rates or their actual risk.
The manner and process by which their insurance claims advocate handles the policy’s claims reserve can either save or cost contractors tens of thousands of dollars per year in premium rates. To understand the claims reserve’s impact on a construction contractor’s insurance premium rates, it’s important to understand its purpose.
The Significance of Claim Reserves in Workers’ Compensation Insurance
In a worker’s comp policy, the claims loss reserve represents the estimated amount of money that an insurer or self-insured entity sets aside to cover the future costs of claims, including payments for medical expenses, lost wages, and other related costs.
While having reserves is crucial for insurers to fulfill their obligations to policyholders, excessive reserves can lead to various negative consequences, including higher premiums for policyholders. A high claims reserve typically suggests that a company anticipates future losses related to claims that have been reported but not yet settled or paid out.
The ideal is to strike a balance between maintaining adequate reserves and ensuring competitive premium rates. In the course of business operations, where things are changing continually and always in flux, the reserve is not a “set it and forget it” factor that is chosen once at policy inception and then filed away in the policy documents — although this is how many insurance brokers treat it.
Let’s look at some ways companies can take better control over their premiums and their policy by paying specific attention to this essential factor.
Strategic Benefits of Timely Claim Reserve Reviews
It’s not uncommon for us to review a new client and find their claims reserves are misaligned with the actual circumstances. We often see cases where claims reserves are still being held open even though the employee had returned to work months ago. For as long as that claim remains open, that company is paying a higher premium based on the money held aside for future anticipated payments.
Beyond just paying higher premiums for higher reserves, there are other factors tied to the reserve amount that matter tremendously in the price and risk factor or the policy as a whole.
The amount held in reserves affects the company’s loss ratio and experience modifiers (MODs), all of which have a significant and material impact on rating and pricing. Policyholders with excessively high reserves may find themselves at a competitive disadvantage compared to those with more accurately assessed reserves. Insurers may scrutinize insurers with consistently high reserves, as it could indicate poor claims management practices or overly conservative financial reporting.
Regular and timely claim reserve reviews matter throughout the year, but these reviews are even more critical before each annual review when the entire risk portfolio is re-evaluated and re-rated. Each year during a company’s annual review, claims reserves are a considerable factor in the determination of the entire risk as a whole.
Implementing a Claim Reserve Review Process: Best Practices
The frequency of claims reviews conducted by a claims advocate can vary depending on several factors, including the size and nature of the company, the volume and complexity of its claims, and industry-specific risk factors. However, here are some general guidelines to consider:
- Triggering events: Companies may also conduct claims reviews in response to specific events, such as significant claims or losses, changes in insurance coverage or policies, or regulatory developments that may impact claims management practices.
- Policy renewals: Claims reviews are often conducted in conjunction with insurance policy renewals to evaluate the company’s claims experience and negotiate favorable terms and pricing for the renewal policy.
Ultimately, the frequency of claims reviews should be tailored to the company’s specific needs and circumstances, with a focus on proactive risk management and continuous improvement in claims management practices. Working closely with a claims advocate or risk management consultant can help companies develop a customized approach to claims reviews that aligns with their goals and objectives.
The Role of Your Claims Advocate in Claims Reviews
Partnering with the right claims advocate can make a world of difference in the outcomes of workers’ compensation claims. Not all advocates are created equally, and the expertise, approach, and advocacy style of a claims advocate can significantly impact your premiums and financial results.
The role of the claims advocate in workers comp insurance is not a backseat job. At Western Republic, a skilled claims advocate begins by conducting a thorough initial assessment of the claim, gathering crucial information about the incident, damages, and insurance coverage. They meticulously analyze the claim, collaborating closely with internal stakeholders to assess its potential impact on the company’s operations and finances. It’s knowing what to look for and when and knowing how each factor affects another. It’s about setting your company up for financial stability without overpaying for protection you don’t need.
From negotiations with insurance company adjusters to challenging reserve estimates and advocating for fair settlements, a proficient claims advocate ensures the company’s interests are represented throughout the claims process, ultimately working toward achieving optimal outcomes while minimizing financial exposure.
About Western Republic
Locally owned and operated since 2009, Gabe Stubin of Western Republic Insurance Services has delivered quality insurance solutions to individuals in Huntington Beach, California, for over 17 years. Specializing in Commercial Business insurance coverage, our team of knowledgeable insurance professionals is committed to helping you find a policy that fits your needs. We focus on providing individualized attention and quality customer service to create an experience that’s difficult to find in today’s market. At Western Republic Insurance Services, we’ll work with you to ensure that you and those you care about most are protected. We invite you to call Western Republic for a complimentary review of your workers’ comp claims reserve.