Claims adjusting requires a broad base of specialized knowledge.Whether claims practitioners work in the property and casualty orlife and health fields, they need to know about law, contracts(policies), medicine, engineering and construction. Workers'compensation adjusters must also maintain an intimate knowledge ofmedicine including orthopedics, neurology, internal medicine andpsychiatry. Additionally, they must have an in-depth knowledge oflaw and statutory construction, human relations, negotiations,underwriting and a smidgeon of actuarial science, and they must bepatient, inquisitive and composed.

Knowledgeable claims adjusters understand that they have adirect impact on the cost of their insured's Workers' Compensationinsurance. There are a number of concepts that many exceptionaladjusters practice in order to provide accurate and timely claimshandling.

1. They consistently refer to and follow prescribedclaims management protocols.

Good faith claims management and proper reserving are paramountto the financial success of any workers' compensation program. Goodfaith claims management is also critical to the fair and equitableapplication of the workers' compensation statute as it applies toinjured employees.

Defined claims management practices and procedures bringcontinuity and equality to the claims process. Workers'compensation adjusters should consistently refer to their claimsmanagement protocols, and insurance regulations in many statesrequire such guidelines. Furthermore, following such protocolsbecomes a primary defense if allegations of bad faith claimspractices arise.

2. They have an in-depth working knowledge of theworkers' compensation statute.

The task of the adjuster is to fairly and equitably apply theverbiage and tenets found within the workers' compensation statute.Therefore, it is incumbent upon the adjuster to understand thestatute and how it could be interpreted.

The claims adjuster should maintain a paper copy of the statutefor easy reference. Many adjusters learn about the statue by wordof mouth or from other adjusters and legal counsel. While this ishelpful, it cannot replace first-hand knowledge of the statute. Anadjuster who is not knowledgeable about the compensation statutewill have difficulty applying it in a fair and equitablemanner.

Likewise, exceptional claims adjusters understand current caselaw and how it applies to the management of their portfolio ofclaims. While not functioning as legal counsel, claim handlersmaking decisions on behalf of an insured organization should have aworking knowledge of statutes and current case law. Such knowledgewill complement the legal defense of a claim when the factualscenario suggests that an aggressive posture is indicated.

3. They promptly and accurately formulate and establishreserves.

Properly established reserves can have a positive effect on theinsured's Workers' Compensation insurance costs. (TheSarbanes-Oxley Act and other financial regulations require insurersand self-insureds to accurately document their liabilities). Inorder to promptly and accurately establish reserves, theexceptional adjuster is well-trained, experienced and employsreserving assistance software. He or she is also fluent in thedisciplines of law, medical management, claimant psychology andlitigation management. Generally, the adjuster's reservingphilosophy should encompass the parameters of promptness andaccuracy.

4. They utilize reserving assistance.

Workers' Compensation insurance is predicated on historical lossinformation. There are several commercial databases available thatprovide information to aid adjusters in determining the length andcost of a disability. Traditionally, the formulation of reserveshas always been a subjective process based on the adjuster'smedical expertise and experience. This leads to a lack of accuracyand continuity in establishing reserves. Statistical databasesbring objective criteria to the reserving process and must beutilized with the subjective attributes of expertise andexperience.

One of the more commonly used reserving tools involvesevidence-based medical guidelines. Such disability time and losscost parameters are formulated from a number of medical databasesand add considerable objectivity, credibility and consistency tothe reserving of claims. State-of-the-art claims departmentsprovide these tools to their workers' compensation adjustingstaff.

5. They understand the fundamental components of theexperience modification formula.

Knowledgeable adjusters understand that how they manage claimsaffects their insureds' income statements (P&L) and the cost oftheir Workers' Compensation insurance. Any incorrect or unrelatedpayments or inaccurate reserves will unnecessarily increase thecost. Knowing the components and function of the experiencemodification formula allows adjusters to understand how theiractions influence the cost of an insured's insurance.

The simplified experience modification formula is:

The Insured's Actual Incurred Losses (Paid +Reserved)

— DIVIDED BY —

Their Expected Losses (expected losses are aproduct of the insured's anticipated payroll and predicated, inpart, on the insured's historical loss experience)

6. They understand the concept of net presentvalue.

Adjusters often conclude claims by paying monies that accountfor future benefits, but a dollar today will not have the samevalue in future years. Understanding net present value and itsfuture effect on the value of claims will assist the adjuster informulating a reasonable and fair cost of the claim. Whileconsidering the time value of money in the formulation ofsettlements is an important factor, most insurance companies andinsurance regulators do not allow the use of present value ordiscounting when establishing reserves.

Related: The millennial claims writer: Training a newgeneration

(Photo: iStock)

7. They understand the concept of lossdevelopment.

Exceptional adjusters understand that the term loss developmentis associated with the growth or reduction of the loss cost ofclaims over time. Loss development tracks how well the adjusterreserves files during a specific period. The goal in reserving isto recognize the ultimate cost of the claim as early as possibleand maintain that financial posture. Loss development shows howearly and accurately the adjuster estimated that liability, and howthe claims cost grew or decreased because of uncertainty over theclaim's ultimate value. Adhering to the reserving philosophy statedearlier will help refine the loss development curve.

8. They understand the concept of the Incurred But NotReported loss (IBNR).

The IBNR is an actuarially forecast loss amount based on theadjuster's claim reserves and loss payments. The IBNRmathematically indicates there are claims “out there” that haveoccurred but have yet to become known or reported. Also included inthe IBNR is a factor for insufficient claim reserving(under-reserving) known as the Incurred But Not Enough Reserved(IBNER). Both show up as liabilities on the insurance company'sbalance sheet or that of the self-insured program. Exceptionaladjusters understand that their accuracy in stating claim reserveshas a paramount effect on the financial success of the insurancecompany or self-insured program.

9. They work closely with a loss control specialist andthe insured to build a comprehensive workers' compensation riskmanagement program.

Claims management is just another form of loss control becauseit seeks to control the cost (severity) of the loss. Generally, aloss control specialist seeks to keep the losses from occurring bycontrolling the frequency of loss. The loss control specialist andthe claims management specialist should work in concert to identifythe trends in frequency and severity of the insured'saccidents.

By physically inspecting working conditions and analyzinghistorical loss information, these specialists should help theinsured identify, prevent and reduce the cost of their claims. Losscontrol is the cornerstone of any comprehensive insurance program.When the risk management team (loss control and claims) workstogether, exceptional adjusters understand that the insured'sworkers' compensation program is being prudently managed.

10. They measure their performance.

The workers' compensation business, like other forms ofinsurance, is numerically driven. Therefore, tracking performanceis relatively easy using spreadsheets and databases. Exceptionaladjusters have a number of measurement tools to help them monitortheir success in managing claims. A plethora of benchmarks is notindicated, but three or four measuring tools such as average lengthof time a claim is open, average cost per claim, accuracy ofreserving (loss development) and response time to new claims areindicated.

11. They understand the concept of subrogation and itsimpact.

In workers' compensation, the employer/insurer is the soleentity financially responsible for the employee's work-relatedloss. Payment is through the workers' compensation statute andclaims process. However, if a third party other than the employeror a fellow employee causes the loss, the insurance company maysubrogate the loss and sue the negligent (loss causing) party.Exceptional adjusters are cognizant of potential third-partyrecoveries in any form (e.g., second-injury funds, negligent thirdparties, reinsurance). They look for subrogation possibilities onevery claim they handle.

Workers' compensation adjusting is a discipline that requires abroad base of specialized knowledge because the claims process issophisticated and complex. Exceptional adjusters are consistentlyupgrading their specialized knowledge and claim skills. Having aworking knowledge of premium development, underwriting, losscontrol and actuarial science will help adjusters understand theimportance of what they do and how it affects the entire insuranceprocess.

Brian Francis ([email protected]) is a risk manager andlitigation consultant in Southfield, Mich.