Many frontline claims handlers do not understand the actuarial process and, as a result, they do not appreciate the impact that the claims administration and reserving processes have on the financials of the insurance company or of self-insured employers.
Neither do most claims operations regularly receive targeted actuarial reports from the actuaries. A lack of information keeps them from focusing on the claims that will have the most positive impact on the actuarial outcomes.
Actuaries require accurate and timely information 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 that 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, experience and certification.
The actuarial profession was initially developed for insurance companies to help determine prices for “cost of goods sold” in the insurance product as well as the 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 that sell large-deductible programs, as well as state governments that 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 recognize only 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” that is driving much of the negative results. A refocus 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 that 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's insurance department oversees all insurance company activities, including reserving practices. 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 that can impact the projected ultimate 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” is 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 state oversight bodies do not formally recognize that there can be ongoing medical inflation impacting the reserving process. They require the medical reserves for calculating future medical cases to be calculated using only the recent year's average annual expenses multiplied by the workers’ life expectancy rather than also including an annual inflation multiplier. Some actuaries include a medical inflation rate in their calculations of the ultimate loss.
Changes in exposure may impact actuarial results
Claims handlers have a direct influence on most (not all) of the factors that impact the actuarial projections. One of the most important factors for accurate actuarial results is consistency in the reserving practices. This is why the timing of the reserve changes and the accuracy of the reserves is considered one of the fundamental jobs of the claims 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 that can change the actuarially predicted outcomes for the employers (development factor):
Prior to the production of the annual actuarial report, there should be at least one meeting among the claims management, the actuary and the employer to discuss the overall claims handling process; whether 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 indicate problems in the numbers and raise red flags with oversight administrators and auditors.
Compare your actuary results with those from your independent auditor. Look for differences as well as similarities.
Ask your actuary for a list of open claims that will have the greatest positive impact if closed within the year.
Bill Zachry is a board member of the California State Compensation Insurance Fund.
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