Magazine article Risk Management

A New Way to Calculate Workers' Comp Reserves

Magazine article Risk Management

A New Way to Calculate Workers' Comp Reserves

Article excerpt

At a time when so much of risk managers' attention is spent figuring ways to reduce the runaway costs associated with their workers' compensation programs, Irvine, CA-based Risk Data Corp. has designed a system to provide more accurate predictions of workers' compensation loss reserves and reduce the time needed to estimate claims costs.

In automating the tasks that have traditionally been performed manually by claims examiners, the Micro Insurance Reserve Analysis (MIRA) system offsets the erosion of reserve accuracy that has taken place in a rapidly changing workers' compensation cost environment and counterbalances the problems having to do with the high job turnover and inexperienced examiners.

According to Mark Hammond, founder and president of Risk Data, the problems most risk managers face in managing these costs have been compounded by state workers' compensation reform, inflation and ever-changing benefit laws.

The system estimates the costs and duration of a company's workers' compensation claims and calculates loss reserves based on the individual characteristics of a claim.

"MIRA is knowledge-based; it uses historical information and has the advantage of accessing years of statistical data as a basis for cost estimates," explains Mr. Hammond.

MIRA determines whether loss reserves are overstated or understated by analyzing up to 66 individual claim characteristics, including jurisdiction, class code, age, body part, nature of injury, litigation, vocational rehabilitation and disability factors. Based on these factors, the system calculates per claim estimates for medical, indemnity, vocational rehabilitation and allocated reserves as well as the duration of the claim.

To create MIRA, Mr. Hammond says Risk Data first analyzed more than 3 million closed claims over 10 years. The system, he explains, was built around the data of 14 workers' compensation insurers, which represent 27 percent of the workers' compensation market.

In addition, Risk Data customizes MIRA to reflect legislative differences for the benefits and workers' compensation laws of each state, Mr. …

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