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Reserve Auditing To Reduce Your Experience Modification Rate

By December 13, 2021No Comments
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What Is A Reserve Audit?

Auditing the reserves set on workers’ compensation claims is an important function for Risk Managers tasked with reducing their Experience Modification Rates and insurance premiums. And, it is the only way to proactively manage your next renewal Experience Modification Rate.

Over-reserving of claims (setting reserves unnecessarily high) is not uncommon. When over-reserving occurs, it has the effect of increasing your next Experience Mod and, as a result, increasing your work comp insurance premiums.

The process involves identifying open claims with suspiciously high reserve values and working with your broker and claims adjuster to negotiate more favorable (lower) reserve values. This will then have the effect of reducing your EMR once reported to your state’s rating bureau.

How Do I Conduct A Reserve Audit?

First, you want to obtain a currently valued loss run report. Your next, renewal Experience Modification Worksheet will not contain data from your current policy. It will contain data from the three prior years. For example, if your current policy is effective 1/1/21-22 and your next EMR is effective 1/1/22, the “experience” that will be in your mod is from 1/1/20-21, 1/1/19-20, and 1/1/18-19.

If your carrier offers online claim access, you will want to enroll. Once you get into the audit process it’s preferable to have access to up-to-date valuations rather than working off a report that may be several weeks old.

Second, you will want to work with your in-house claims expert and your broker to identify claims you believe are reserved at suspiciously high values. Then, provide your adjuster with as much supporting information as you can and discuss with him/her your concerns regarding why you believe the reserves should be taken down.

Be strategic and do not simply challenge all of your open claims. Otherwise, you may not be taken seriously and run the risk of damaging the relationship with your adjuster or adjusters.

Also, keep in mind that your adjuster may not be the person who actually has the authority to take down your reserves, even if they agree. There is typically a pecking order that may include Adjuster, Senior Adjuster, Supervisor, Manager, etc. If you have a claim reserved for $500,000 that you believe will eventually close out for $150,000, your adjuster might not have the authority to to reduce your reserves that much. It may have to be forwarded up the ladder to the desk of the Senior Adjuster or Supervisor.

Timing Is Everything – Valuation Date

A Reserve Audit has to be completed within a specific time frame. Specifically, it must be completed before your work comp program’s “Valuation Date.”

The Valuation Date is six months following your renewal date. If you renewed on 1/1, your Valuation Date is 7/1. On the Valuation Date your insurance carrier and, possibly, prior carriers will report all of your claims, payroll, and classification code data to NCCI or your state rating bureau. On this date the claim values on open claims will be reported and “locked” for the calculation of your next Experience Modification Rate.

If your reserves are reduced after your valuation date and before your renewal date, it will not help your Experience Modification Rate. No correction reports are submitted in this case.

So, your Reserve Audit must be completed before the Valuation Date.

Because of this you are going to want to start planning a Reserve Audit shortly after you renew even though you have six months before your Valuation Date. Realistically, you want to give yourself 90 days or more to complete your audit from start to finish. But, I’d recommend letting your staff and broker know early that you want an audit performed and to put this project on the calendar.

Interested? Contact Us.

If successful negotiating lower reserves, you will decrease your upcoming Experience Mod and directly reduce the cost of your renewal premiums. Please reach out if you think a Reserve Audit could benefit you.

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