What are "reserves"?
An estimate of the eventual total cost of claims.
Who decides reserve amounts?
Insurance company claims department staff estimate the eventual total cost of claims. Some insurance companies use third party administrators (TPAs) to process their claims, but the insurance company is ultimately responsible. The employer and agent can certainly provide input into the estimating process. Employers have a right to an explanation of how reserves are estimated and can challenge reserve amounts if they disagree with the estimates. However, the setting of reserves does involve judgment, and it is the carrier's decision. If an employer is constantly disagreeing with its carrier on reserve amounts, then the employer would probably desire to change carriers.
What are "incurred" costs?
The incurred costs or incurred losses for a claim are the amounts that have been paid out so far plus the reserves for future, anticipated losses.
What is IBNR?
IBNR stands for "incurred but not reported." For instance, if we are looking at claims for a policy effective 1/1/2018 to 1/1/2019 a month after the policy expires (in February, 2019) there could be some injuries that occurred but have not yet been reported to the employer by the worker, or reported to the carrier by the employer. So, when actuaries estimate reserves, they make an adjustment for these unreported claims. Based on past experience, they can estimate amounts for unreported claims, so IBNR amounts become part of the overall reserve.
How do reserves affect employers?
They can have an impact on the premiums of most employers and must be carried as liabilities on the balance sheets of self-insured employers. In Indiana, employers qualify for experience rating when their premium reaches an annual average of $2750. The experience rating formula compares actual losses against expected losses. Reserve amounts for open claims are treated as actual losses, so reserves directly impact the experience rating modification factor.
The ICRB suggests employers and agents use the "Sweet 16" guideline. Since carriers must place a value on all claims 18 months after the policy effective date, then they should be in contact with the carrier 16 months after the policy effective date and be sure they understand the reserves that will be assigned to their open claims.
Once a carrier reports the payroll and loss data to the ICRB, due 20 months after policy effective date under the Unit Statistical Plan, the amounts are only updated annually thereafter, unless a clerical error or subrogation occurs. "Errors in judgment" do not get corrected.