Whenever a claims quality auditor or actuarial auditor seesnumerous small upward changes in the workers' compensation claimsreserves, he knows he has a case of an adjuster stair-stepping thereserves. If you draw a graph of the reserves, it looks like a setof steps—flat, up, flat, up, flat, up.

When the adjuster keeps raising the reserves in relatively smallincrements to pay medical bills, indemnity or expenses, a basicprinciple of accounting is ignored. Sound accounting for aninsurance company or self-insurer is to set aside money to meet thefinancial obligation brought on by the claim against the insurancepolicy. When the adjuster does not establish the correctreserve, the insurer's financial balance sheet is inaccurate,either overstating or understating its assets. Withstair-stepping of reserves, the insurer assets are overstated onthe balance sheet, as the liabilities—the claim where the reservesare understated—are incorrect.

The ultimate cost (also known as total cost) of the workers'compensation claim is the amount that should be shown on thereserves at all times. When the claim is assigned to theadjuster, all the information needed to establish the ultimate costof the claim is not known to the adjuster, so there often will bechanges in the amount of reserves over the life expectancy of thefile.

The initial reserves should be based on the adjuster'sexperience with similar claims, but as facts change—the employeehas surgery, the employee's level of disability is greater orlesser than normal, the claimant has co-morbidity issues thatlengthen the recovery process, and so on—the reserves should beraised or lowered as needed. However, if the adjuster israising the reserves to pay for this week's medical treatment, andraising the reserves next month to pay for the next doctor's visit,the adjuster is stair-stepping the reserves.

The difference between the actions of the adjuster who increasesthe reserves correctly and the adjuster who is stair-stepping thereserves is the number of reserve changes. A few well-reasoned andcarefully thought out reserve changes is the proper way of makingreserve changes. Many small reserve changes without any thought asto the ultimate value of the claim is stair-stepping thereserves.

To avoid stair-stepping the reserves, the adjuster needs to knowseveral things, including:

• Expected recovery time for the employee
• Average weekly wage and the indemnity rate (as all indemnitycalculations flow from these numbers)
• Ability of the employer to return the employee to work onmodified duty or light duty while he recovers from the injury
• Approximate cost of the medical procedures the employee willhave for the type of injury incurred
• Reputation of the medical provider for returning employees towork or keeping them off work
• Anticipated level of permanent disability the employee willhave
• Cost of services for medical case management, legal, and otherclaim-associated costs
• Requirements of the workers' compensation statutes where theemployee will receive benefits.

The claims office will have either an electronic or paperreserve worksheet calculation page where the adjuster can fill inthe calculations for each of these items to obtain an accurateprojection of the future/ultimate cost of the claim. This willresult in the accurate projected value of the claim and the correctamount of money for the adjuster to place in reserve. Whenadjusters skip the reserve worksheet calculation step, they oftenend up stair-stepping the reserves.

Stair-stepping can be avoided by the utilization of the knowninformation about the medical, indemnity and expenses for theindividual claim. Proper reserving keeps the insurer'sfinancial balance sheet accurate, while stair-stepping reservesunderstates the insurer's liability.