Published: 12-Dec- 2010 | Product Category: Claims
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Skyrocketing, unpredictable workers' compensation costs and a growing inventory of aging claims have required many companies to increase their workers' compensation reserves.
Outstanding workers' compensation liabilities demand attention from both financial executives and risk managers. Some organizations have been forced to evaluate financing options, including additional collateral or letters of credit, just to support growing reserve requirements. With outstanding liabilities remaining on corporate balance sheets, businesses are faced with decreased operating capital.
Workers' compensation reserves also are coming under closer scrutiny from both auditors and analysts. Sarbanes-Oxley and other regulations require an accurate accounting of outstanding liabilities, making balance sheet credibility even more critical. For some organizations, future reserves may prove troublesome if calculations become outdated or are incorrect.
Companies that move from claims administrator to claims administrator often face run-off claims from multiple sources—essentially leftover open claims still managed by a previous and often disengaged administrator. Mergers and acquisitions also may create pockets of run-off. With little incentive to close open files, claims administrators rarely take an aggressive approach with run-off from former clients.
Additionally, open claims can dramatically raise the cost of a loss portfolio transfer. Companies that reduce inventories only need to transfer the most troublesome and difficult-to-close claims.
Proactive companies are taking advantage of aggressive claims closure strategies to reduce the number of open claims and limit outstanding liabilities. With open files under control, organizations can move forward and focus on preventing new claims and managing active files.
What Will You Say When They Ask What Happened?
Executives concerned with outstanding workers' compensation liabilities, should ask themselves the following questions:
- Do we understand the magnitude of our outstanding workers' compensation claims inventory?
- Do we have significant collateral requirements based on our liabilities? Is this affecting our bottom line?
- Are we facing extensive liabilities from sold or acquired business units?
- Is our claims portfolio continuing to deteriorate year after year?
Who’s Looking Out for You?
Marsh's claims inventory workout process is specifically designed to accelerate the closure of open claims and to reduce outstanding liabilities through focused project management. It is a cost-effective process with clearly defined goals and financial benchmarks to measure success.
Companies rarely have internal resources dedicated to aggressive claims closure projects. Additionally, when staff time and attention are diverted to legacy claims, current results may suffer and liabilities eventually may increase again. By outsourcing claims closure activities, clients are better able to focus internal resources on positively influencing current and future losses.
Providing focused and dedicated resources, Marsh closely manages the claims closure process over a finite period of time and clients typically see positive results within the first 12 months. Additionally, Marsh's proprietary technology solutions—such as TrendTracker™—can help streamline the process and improve results.
Benefits from an aggressive Marsh-managed claims closure project include:
- Reducing outstanding liabilities
- Reviewing reserve requirements
- Avoiding accelerated deterioration of claims inventory
- Minimizing administrative involvement in multiple claims programs
- Reducing internal and external claims administration costs
- Offering a cost-effective alternative or pre-cursor to a loss portfolio transfer
The process includes conducted in three phases. During the first phase, consultants analyze the company's book of claims to confirm that current reserve estimates accurately reflect the client's exposures.
In the second phase, claims are evaluated based on information provided by the claims administrator (typically by file review) and assigned to one of four categories:
- Category I—greatest potential for settlement/closure, immediately or within 90 days
- Category I—specific action needed to move claims closer to settlement or closure within 12 months
- Category III—specific action needed to move claims to settlement within 12-24 months
- Category IV—deemed not appropriate or impossible to reasonably settle. These claims may ultimately be disposed of via annuities and/or medical trusts, subject to state workers' compensation laws
In the third phase of the project, consultants review the claims inventory by category and:
- Close Category I claims within a 30- to 90-day window
- Develop a strategy for those claims that can be closed within three months to a year
- Create resolution plans for remaining claims, monitor medical progress, and reassess closure strategies as appropriate
- Complete a periodic assessment of remaining open files (Categories II-IV) and update resolution plans as needed
Workers' compensation claims remain open far longer than other claims; costs are unpredictable and, more often than not, continue to rise. Open claims can be a drag on corporate earnings and business growth. Resolving claims and maintaining ongoing resolution strategies for remaining open claims will result in shorter claims durations, lower payouts, and reduced liabilities.