Claims professionals understand the importance of properly reserving workers’ compensation claims. Yet, despite the attention given to complex large loss claims associated with catastrophic injuries, accurate reserving is a big challenge.
In a May 2009 industry survey by Wilson Associates titled “Catastrophic Injury Management in the Workers’ Compensation Industry,” respondents provided the following answers when asked what tools were used to estimate reserves for catastrophic cases:
Individual Judgment 48%
Internal Guidelines 19%
Third-Party Experts 11%
Predictive Model 6%
These results explain a great deal about why so many catastrophic cases are under-reserved.
The predominant use of individual judgment has many limitations, the most important of which tends to be the small sample sizes of comparable cases. Catastrophic injuries vary greatly from one case to the next. Differences in the patient’s age, weight and other factors make enormous differences in cost projections. It is rare to have large enough pools of comparable cases to make these distinctions and accurately predict total costs.
In addition, there are other factors that are often responsible for less-than-adequate reserve setting. These include:
- Lack of access to credible data. Very few external resources exist to use in benchmarking comparable cases, and claims professionals often find it difficult to access their own data for predictive purposes due to system limitations.
- More volatility than expected. The costs associated with intensive care, multiple surgeries, the involvement of multiple specialists and high medication needs can often be highly unpredictable and require probability-adjusted estimations for the complications that can occur through missed handoffs and medical treatment.
- Unrealistic durations (often too short). Many project expenses for only the acute period of care and grossly underestimate the complications that can and do occur years later as the body ages and the prior trauma causes ongoing complications and spikes in medical costs.
- Abundance of optimism. Often there is the hope or expectation that “this claim” will recover without complications, yet, the statistical reality is that with catastrophic injuries, the abundance of optimism principal rarely holds.
- Abundance of pessimism. Conversely, one may believe that “this claim” is so severe that the patient will die and therefore not require traditional services; again, statistically, the abundance of pessimism is not borne out in medical evidence.
When you understand these five potential pitfalls and seek out professional guidance and expertise, it is possible to accurately set reserves for complex large loss cases. What resources have you found helpful when setting reserves for this type of case?
Contact Paradigm today to refer a case at 800-942-1725 or feel free to join our social communities for more industry discussions. We also invite you to read our whitepaper entitled “The Catastrophic Reserving Challenge” for more information: http://www.paradigmcorp.com/images/stories/pdf/4250.pdf.