How Open Claim Reserves Impact Your Premiums

When you create a budget for your personal finances, you probably set aside some money for future expenses such as paying for a vacation. In many cases, you don’t know the exact cost of the future expense, so you have to take an educated guess for budgeting purposes.

Insurance claims adjusters go through a similar process.

Key Takeaways

• A claim reserve is the insurer’s running estimate of what a claim will ultimately cost — it’s not the final number, and it should be updated as new information comes in, often on a bi-weekly basis.
• Underwriters lean heavily on your loss runs (a report of past and open claims) when deciding whether to offer coverage and at what price, so accurate reserves directly shape your quote.
• An open claim with an inflated or outdated reserve can make your loss history look worse than it actually is, potentially inflating your premium unnecessarily.
• Two common reserve errors — a resolved claim left open in the system, or a reduced reserve that was never updated — are both things a policyholder can catch by reviewing loss runs before renewal.
• Both open and closed claims factor into how underwriters price your risk, so a full review of your claims history (not just recent activity) matters at renewal time.
• A quarterly reserve review with your claims team can catch inaccuracies well before they show up in a renewal quote, rather than discovering them after the fact.

When a claim is reported, the claims adjuster establishes an expected budget for the claim, and that budget is known as a claim reserve. The reserve is an estimate because the insurer won’t know the exact amount that will be incurred until the claim is closed.

In some cases, the reserve will be fairly predictable, like the cost to repair a totaled vehicle. In other cases, the estimated cost may be far less certain, like when a worker suffers a back injury.

Claim conditions can evolve rapidly, so claims adjusters should adjust the claim reserve each time they review the claim – often bi-weekly.

Below is a simplified example of the reserving process for a work comp claim involving a back strain:

• Day 1: Based on initial reports, the adjuster sets a reserve for $3,500. This budget should cover three doctor visits, physical therapy, imaging and two weeks of lost time from work with no permanent disability.
• Day 14: Based on interim reports, the adjuster increases the claim reserve to $19,000. Now, it appears that the injured worker will be off work for at least three months. Additional treatment and an MRI are needed. An independent medical exam may also be required.
• Day 42: The injured worker recovered more quickly than expected and has returned to work with no limitations. Only $6,800 of the $19,000 reserve was used. The claim is closed with a total incurred of $6,800.

How Do Reserves Impact Premiums?

When you apply for insurance, or your account is renewed, the underwriter reviews your company’s loss runs, which typically include the past three years of open and closed claims. While the final figure isn’t yet known for open claims, reserves provide the underwriters with a good estimate of what will be paid. These numbers help determine if the carrier offers you coverage, and how much they will charge.

If the open claim reserves are accurate when your loss runs are reviewed by the underwriter, you should receive a quote that reflects your true loss experience.

But what happens if the open claim reserves are not accurate? Imagine these scenarios:

1. The claim was resolved with a much lower amount incurred than what was reserved, but the claims adjuster forgot to close the case in the system so it is still listed as an open claim with a high reserve on your loss runs.
2. The claim looked serious at first, prompting a high reserve – but then the situation improved and the needed reserve was less. However, the claims adjuster forgot to reduce the reserve in the system, so the high reserve still shows on your loss runs.

In both these scenarios, your quote could be inflated due to inaccurate open reserve information on your loss runs!

What Is a Loss Run, Exactly?

A loss run is the report insurers and brokers use to summarize your claims history — typically the past three to five years of both open and closed claims, along with their current reserve or final incurred amount. Underwriters request your loss runs when quoting new or renewal coverage, and they’re one of the most heavily weighted pieces of information in that decision. Because loss runs pull directly from the same reserve data discussed above, an inaccurate reserve on an open claim shows up on your loss runs too — which is exactly why reviewing both together matters.

How Can You Keep Your Costs Down?

The best way to keep your costs down is to manage your risks. If your claims history shows a high frequency or high severity of claims, underwriters may determine that the chance of future claims is also high, and they will charge higher premiums.

Both closed and open claims can have an impact on your premiums, so it’s important to review your loss runs regularly and to be aware of your open claim reserves. In our experience, the businesses that catch reserve errors earliest are the ones who ask their broker for a mid-year loss run pull, not just the one that arrives automatically before renewal.

Don’t Let an Outdated Reserve Inflate Your Renewal

The Heffernan Claims Advocacy Team can perform a quarterly analysis including reserve review, collaborate with your claims adjusters, and keep you apprised of any notable developments to help you avoid surprises at your coming policy renewal. If claims trends in your industry are on your mind, our post on the rise in California cumulative trauma workers’ compensation claims is worth a look too. If you’d like assistance in these areas, ask your Heffernan Insurance Broker to introduce you to the claims team.