Workers’ Comp Under Reserves Revealed

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California’s Workers’ Comp Bureau reports that the state’s work comp carriers are under reserved by nearly $12 million. The claim reserve should be an estimate of what all workers’ compensation claims will ultimately cost, and according to this latest report insurers have fallen far short of the setting aside the necessary dollars to cover future claims. The Bureau reports that carriers’ reported losses, which include paid loses and case reserves, are $11.9 billion less than what the bureau estimates it will cost to pay the claims.

When reserves are too low, it creates unfunded liabilities, which eventually results in a shortfall. If the insurer does not have the assets to meet its obligations, the result is insolvency. I have witnessed at least a dozen California workers’ comp insurers go out of business as a result of under reserving, which left thousands of policyholders to deal with regulatory bureaucracy and multi-year delays in claims payment. This was the case with CalComp/Superior National.  When an insurer fails, it damages its client’s (the employer) reputation, hurts its employees and results in higher future premiums for the insured.

In the case of another insurer failure, Employers Direct, underwrote business at rates considerably below market, but incurred claims at market cost. After it was sold, the buyer soon found that claims were considerably under reserved, causing the company to have to cease writing new business and take a huge write off to fund additional reserves.

What the results of this recent report from the California Workers’ Comp Bureau means to you is that it is essential you are confident your insurance broker places your business with a solid insurer who has the reserves and assets to service all claims.

(Source: Workers’ Comp Executive © 2014) Risk Management Answers, Steve Paulin, Stephen Paulin

 

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