Understanding insurance language helps you better manage risk

Would you like to understand the workers' compensation "lingo" you hear from your agent or adjuster? One of the most important terms you will hear is "reserves." Reserves are funds allocated by your insurance carrier or claims administrator to pay your claims.

If your employee is injured, an adjuster, in addition to managing the medical care, must estimate the total cost to pay the claim from initial treatment through settlement. If employees are hurt so badly their injury impairs their future capacity to work, adjusters must estimate the amount to pay for this impairment early in the life of the claim, as well. The cost of investigating, defending and managing the injury is also predicted. If vocational rehabilitation is required in your state, your adjuster must assess these costs, as well.

It is easy to understand the reserve system if you think of it as four "buckets":

1. Medical costs, which pay doctor visits, prescriptions and physical therapy.
2. Wage replacement, called temporary partial disability or temporary total disability. Future lost earnings are called permanent partial disability or total disability. You may hear these categories called indemnity.
3. Vocational rehabilitation, available depending on the jurisdiction of the injury. If not required by statute, carriers rarely offer rehabilitation services.
4. Loss adjustment expenses are costs that assist in evaluating, defending and paying claims. These include independent adjusters, attorneys, surveillance costs or nurse case managers.

Estimating the ultimate cost of claims and related expenses is a complicated process and requires a great deal of experience. Because reserves set on your company's claims greatly impact your experience modification factor, reserves should be closely monitored. Review loss runs at least quarterly to watch reserve development. Large reserve increases generally mean an injured worker's condition is deteriorating and additional medical intervention is needed. As the client, you must sometimes be the squeaking wheel that keeps a claim moving forward. Don't rely solely on your claims administrator or carrier to ensure your claims are receiving adequate attention.

It is a good idea to meet with your agent on a regular basis to review your loss runs and talk to your adjusters when questions arise. As you continue to ask questions and provide input, your claims will be better managed. This will ultimately ensure your reserves more accurately reflect the predicted injury outcome, which can help reduce your workers' compensation premium.