Whenever a claims quality auditor or actuarial auditor sees numerous small upward changes in the workers' compensation claims reserves, he knows he has a case of an adjuster stair-stepping the reserves. If you draw a graph of the reserves, it looks like a set of steps—flat, up, flat, up, flat, up.

When the adjuster keeps raising the reserves in relatively small increments to pay medical bills, indemnity or expenses, a basic principle of accounting is ignored. Sound accounting for an insurance company or self-insurer is to set aside money to meet the financial obligation brought on by the claim against the insurance policy. When the adjuster does not establish the correct reserve, the insurer's financial balance sheet is inaccurate, either overstating or understating its assets. With stair-stepping of reserves, the insurer assets are overstated on the balance sheet, as the liabilities—the claim where the reserves are understated—are incorrect.

The ultimate cost (also known as total cost) of the workers' compensation claim is the amount that should be shown on the reserves at all times. When the claim is assigned to the adjuster, all the information needed to establish the ultimate cost of the claim is not known to the adjuster, so there often will be changes in the amount of reserves over the life expectancy of the file. 

The initial reserves should be based on the adjuster's experience with similar claims, but as facts change—the employee has surgery, the employee's level of disability is greater or lesser than normal, the claimant has co-morbidity issues that lengthen the recovery process, and so on—the reserves should be raised or lowered as needed. However, if the adjuster is raising the reserves to pay for this week's medical treatment, and raising the reserves next month to pay for the next doctor's visit, the adjuster is stair-stepping the reserves. 

The difference between the actions of the adjuster who increases the reserves correctly and the adjuster who is stair-stepping the reserves is the number of reserve changes. A few well-reasoned and carefully thought out reserve changes is the proper way of making reserve changes. Many small reserve changes without any thought as to the ultimate value of the claim is stair-stepping the reserves.

To avoid stair-stepping the reserves, the adjuster needs to know several things, including:     

• Expected recovery time for the employee
• Average weekly wage and the indemnity rate (as all indemnity calculations flow from these numbers)
• Ability of the employer to return the employee to work on modified duty or light duty while he recovers from the injury
• Approximate cost of the medical procedures the employee will have for the type of injury incurred
• Reputation of the medical provider for returning employees to work or keeping them off work
• Anticipated level of permanent disability the employee will have
• Cost of services for medical case management, legal, and other claim-associated costs
• Requirements of the workers' compensation statutes where the employee will receive benefits.

The claims office will have either an electronic or paper reserve worksheet calculation page where the adjuster can fill in the calculations for each of these items to obtain an accurate projection of the future/ultimate cost of the claim. This will result in the accurate projected value of the claim and the correct amount of money for the adjuster to place in reserve. When adjusters skip the reserve worksheet calculation step, they often end up stair-stepping the reserves.

Stair-stepping can be avoided by the utilization of the known information about the medical, indemnity and expenses for the individual claim. Proper reserving keeps the insurer's financial balance sheet accurate, while stair-stepping reserves understates the insurer's liability.