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

When the adjuster keeps raising the reserves in relatively small increments to pay medical bills, indemnity or expenses, a basic principle of accounting is ignored. Sound accounting for an insurance company or self-insurer is to set aside money to meet the financial obligation brought on by the claim against the insurance policy. When the adjuster does not establish the correct reserve, the insurer’s financial balance sheet is inaccurate, either overstating or understating its assets. With stair-stepping of reserves, the insurer assets are overstated on the balance sheet, as the liabilities—the claim where the reserves are understated—are incorrect.

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