AI May Be Big, But Nothing Replaces People In Workers’ Comp Claims

Episode Notes

Transcript

Announcer:

Workers Comp Matters, the podcast dedicated to the laws, the landmark cases, and the people that make up the diverse world of workers compensation. Here are your hosts, Jud and Alan Pierce.

Judson Pierce:

Hello and welcome to another edition of Workers Comp Matters. My name is Jud Pierce, coming to you from Lovely Salem, Massachusetts. Today we have a special guest, Michael P. Kelley, who currently serves as Senior Vice President and director of claims operations at Hub International New England, which is a leading insurance brokerage firm, a position he’s held since May, 2014. Mr. Kelley was appointed by the governor of Massachusetts back in 2015 to be the insurance industry representative of the Workers’ Compensation Advisory Council at the Massachusetts Department of Industrial Accidents. Michael holds over 41 years of insurance industry experience, so we’re very happy. He is here to discuss the insurance overview and what’s looking forward in terms of AI and other issues that are coming about in the insurance industry. But before we get to Mr. Kelley, I’d like to introduce person as the audience very well, my co-host, Alan Pierce.

Alan Pierce:

Thanks Jud. Thanks Michael. Michael has been a guest several years ago on our podcast and he has a particular area of expertise in claims handling, claims administration for workers’ compensation cases. He started out in claims and has progressed in a variety of roles from claims representative, claims supervisor, claims manager. Now he is a Embroker consultant supervising claims operations, and there is nobody better to have a broad oversight of what is really for most injured workers, their entry point to the workers’ compensation process and the workers’ compensation system. And those of us who have had our careers begin in workers’ compensation claims, we understand how vital a role the claims rep is in getting claims moving seamlessly if possible, through the system and how to deal with the various complexities. So Michael, I want to welcome you here and maybe to begin our discussion, kind of give us your overview of the role of a claims representative, a claims adjuster in the general practice of workers’ comp.

Michael P. Kelley:

Great, thank you Alan and Judson. My honor to be here with you today. My career started back in 1982. I got into the insurance business because I had just gotten married. My wife and I had just given birth to our first son and I needed a job with benefits. I was going to Merrimack College at night to finish up my accounting degree and somebody said, why don’t you try this insurance claims job? And they actually really liked me because I grew up in my father’s gas station and I knew a little bit about cars and I got to work in an auto unit. I did that for about a year and then I moved on to more property and casualty type claims and ended up specializing in workers’ comp. But I grew up as an all lines adjuster, have really been specializing in Massachusetts Workers’ comp and New England Workers’ Comp for the last almost 40 years.

So I have a great deal of experience and I really love what I do. There’s nothing better than being able to determine what the law says, what the case law says, and what happens in real life. And I’ve had a really good 40 year run at it. Been alongside you for a long time, Alan, and as we brought jet aboard, we’ve all seen a lot of things, but the role of a claim person is really quite simple. When they get a new claim, their objective on every single case is to bring it to conclusion. It may take 10 minutes, it may take 10 years, but that’s the objective of every adjuster when they get a new claim is what do I need to do to take care of this claim, adjust it and bring it to an end and bring it to closure. So that’s the ultimate objective of every adjuster.

Judson Pierce:

What is the hierarchy, Michael, of workers’ comp claims handling? Who makes the financial decisions, levels of authority, that sort of thing?

Michael P. Kelley:

Well, typically we’re talking about an insured product and there are also self-insured products that we can talk about later. But within the confines of the organization chart for an insurance company’s claim department, you starting at the top, you typically have a claim manager who is in charge of all the people in the department. You may have several units assigned to ’em and each unit would have a supervisor and then anywhere from two to 10 adjusters. And normally claims are assigned in different ways. It could be alphabetical by the name of a client, it could be more typically by jurisdiction or state, and then obviously by complexity. So a normal claim unit for an average insurance company will have a claim supervisor, one or two senior claim. People have been around a long time and handle the heavier type of claims. Couple of medium people recently I’ve heard people refer to them as return to work specialist. And then you have more entry level people that would be handling more routine items or in our world something we call medical only claims.

Alan Pierce:

One thing I’ve noticed change over the years has been the movement from outside claims adjusters, people who started out or who performed the job the way I did. And you did when we started out where we were given really a company car and a Polaroid camera or a digital camera and a statement pad, and we’d go out and visit injured workers and we’d visit the site of the accident, we know who our policy holders are, and we would actually show up at the injured workers’ home by appointment after an injury. I’ve seen the industry moving more and more to claims people being in either large offices or even working remotely. And with no personal contact, what’s your experience been?

Michael P. Kelley:

Well, I got to be honest with you, Alan, it’s one of the saddest stories I’ve ever experienced in my life. I miss the personal contact. I consider myself to be a personal person. I like meeting people not only my policy holder, the employer, but the injured worker coworkers. And when somebody says they’re a machinist, there’s a thousand different types of machinists, what type of machine are they operating on? Are they really more of a computer programmer or they somebody handling metal, putting it into a lathe? So it makes a big difference if you know what they do and how they do it. Just what are the physical requirements of that? We used to go out on every auto claim that we got and every workers’ comp claim we got. We would first go to the employer and we’d take pictures of where the accident occurred, what were the circumstances, what did the coworkers have to say about it or not say about it, what did they see, what did they not see?

And then you’d go interview the injured worker. And probably the biggest thing that I noticed, and this is a true story, I was going to a gentleman’s house where the employer told me that the claim lacked credibility. He didn’t get hurt here, he’s not real, he’s not really injured. So kind of poisoned me a little bit as to, gee, this guy’s kind of exaggerating the injuries. And I pulled in front of his house and I’m walking by the driveway and he did not know I was there. I did not have an appointment when I showed up and the window was open and this gentleman literally was on the couch in his house crying. And when I walked in the house, I took his statement, I told him who I was, and after listening to his story, I determined that the claim was compensable. And back in the day, we used to take out the paperwork, we had our agreements and our dependency forms, and we filled him out on the spot.

And I literally cut him his first check sitting in his living room despite the fact that the employer said that it was not a credible claim. So that personal contact I think is something that is missing today. Some adjusters do a good job of reaching out to all the parties, they do what they can. Obviously with technology we can do a lot taking recorded statements. Now we can FaceTime with people, things that we couldn’t do in the past, but just that personal contact to me is something that has disappeared. And I also think that the carriers have lost a lot as it relates to the investigation. Did they do an appropriate job of looking into potential third party? Did they do an appropriate job of looking into potential second injury fund if it’s applicable in a jurisdiction? These are things that especially if you specialize most claim people today, all they do is handle workers’ comp. All they do is handle general liability. All they do is handle property well. A worker’s comp adjuster really doesn’t understand the tort system, and I’m not sure how they can make decisions on third party whether it exist or doesn’t exist, because one, they don’t have the training and two, they have not seen how it actually occurred.

Alan Pierce:

And by third party, I think you are referring to a circumstance where some other entity caused the injury. And there could be rights of recovery both by the injured worker and the workers’ comp insurer for the negligence of a third party. Somebody unconnected with the employer,

Judson Pierce:

Michael, who does the claim adjuster represent the employer in this case. And what is the role of the employer generally in the claims process?

Michael P. Kelley:

Well, I mean the adjuster represents the insurance carrier or the third party administrator for a self-insured client. So they don’t represent the injured worker. They do represent the insurance company as it relates to the employer. The employer contracts with the carrier through the form of an insurance policy for them to take care of their claim. So my job as an adjuster when I was an adjuster was to go out and determine was an individual injured in the course and scope of his employment. And in workers’ comp, it’s not hard. It’s relatively simple. If somebody sustains an injury at work, their injury is normally compensable. And if it’s compensable, then what benefits are they eligible for around here? Typically the benefits we look at are indemnity or weekly lost wages, medical benefits, permanency, and then if there’s a fatality claim, you have survivor benefits. So not only am I trying to determine if a claim is compensable, but what benefits are available under the applicable statute.

Alan Pierce:

And you mentioned self-insured employers and TPAs define what A TPA is in the claims process.

Michael P. Kelley:

So if an employer is large enough to pay for their own claims, and I’m talking big companies here, Gillette, Raytheon, those type industries, they have the financial ability to fund their own claims. So they will complete the paperwork that each state or jurisdiction has, and they will contract with either their own employees to act as adjusters or they’ll vend out that service to a third party administrator. So I can hire somebody to handle my claim. So if I’m Raytheon, I can go to a local insurance company, I can go to an independent vendors such as Sedwick or Gallagher Bassett. They will forest a service, investigate claims and administer them as if they were the insurance adjuster.

Alan Pierce:

I think it’s a good time to take our first break. We will be back in a couple of minutes with conversation with Michael Kelley on workers’ comp claims. We’ll be right back.

Judson Pierce:

And we’re back with our guest, Michael Kelley. Michael, what kind of role does the claims adjuster get into with respect to a case as it involves finances?

Michael P. Kelley:

So part of the investigation process is to determine what the individual’s injury is and what they will need for treatment going forward and how long should we expect them to be out of work. So again, I mentioned earlier that the benefits include lost time or weekly benefits, medical benefits and permanency. All three issues are distinct depending on the jurisdiction. So if I estimate that somebody has a hernia, for example, they’re going to be out of work for eight weeks, their work is comp rate is a thousand dollars a week, I would establish a reserve on the file of $8,000. So eight weeks times a thousand dollars through experience. I know that from soup to nuts for somebody to have a hernia procedure and go through the recovery process is probably 15 to $20,000. So I would establish that as my medical reserve. And do I think there’s any permanency?

Normally on a hernia procedure, there would not be. There’s not any permanency related to that, at least not nowadays. Maybe there was back in the day, Alan, back when we had to measure scars. But if you think about it, the average claim adjuster has somewhere between 125 to 175 active lost time cases on their diary or their pending. And if you put $25,000 on each case, that’s three to $5 million that one individual adjuster is responsible for managing. That’s a pretty big ask for somebody that does not have a great deal of experience, but it is reality. And then if you get into larger cases, especially today where the average weekly wage in Massachusetts is over $1,800 a week, you’re talking $90,000 a year for one year’s worth of compensation. So the numbers can get much bigger for an adjuster. And typically your more senior adjusters have more authority.

Usually within the insurance organization, the president of the company will designate to the claim manager a certain level of authority. And that authority normally comes in two ways. One is reserve authority how much money you are allowed to put up on a case without talking to your boss. So the manager will have a certain level and he will push that down to the supervisors who will push it down to the senior people who will push it down to the junior people. And those levels depend on the company and the jurisdiction. Some companies are very conservative and they don’t give their staff the freedom to put a significant amount of money on the case without authority from their direct supervisor or even higher or above. So every company has a hierarchy.

Alan Pierce:

You mentioned reserve, and that’s one of the concepts that I think certainly most injured workers have no concept of. In fact, most people involved don’t understand the intricacies. When you put a $25,000 reserve on a case, they hernia a case eight weeks of lost time and 1520 grand for medical expense, you put a $25,000 reserve. Is that just on paper or is there some money that is somehow shifted from one place to another place in anticipation of future payments?

Michael P. Kelley:

Well, part of you got to understand how an insurance company works. They collect premium and they basically say for the exchange for that premium, we will pay claims that the employer is legally responsible for. And the objective of every insurance company is to make money or to not lose money. So they don’t want to have a million dollars worth of claims but only have a hundred thousand dollars worth of premium. So the adjusters role is not directly involved in the profit and loss of the carrier, but it is extremely indirectly related. As an adjuster, I want to put enough money on the case to handle it well, if I’ve got a lot of cases and I put a lot of money on ’em, that’s going to impact the profitability of the insurance company. So there’s a concern there. So adjusters do have a direct impact on the financial outlook of a company, but there’s also, so there’s direct cases with money on them. Well, in workers’ comp, we also know there are cases that have not been reported yet. Or if somebody has surgery and they don’t have a good result, they have a lot more exposure. Now I’m going to pay somebody for a longer period of time due to their ongoing disability. And those things change. And part of the role of the adjuster is to recognize when those issues change and adjust those reserves or the bank account per each claim, either upward or downward, depending on the facts of a case.

Alan Pierce:

Is that $25,000 actually physically taken out of the investment portfolio of the insurer and put into a liquid fund, or is it still churning and earning interest even though it may not be paid out over a span of time?

Michael P. Kelley:

Well, Alan, I’m a claim guy. I’m not the CFO, but I would say that the funds I definitely allocated, but again, workers’ comp pays out over a period of time. So if I have a big case and I put a hundred thousand dollars in it, that a hundred thousand dollars isn’t being paid today. So the CFO is going to instruct his investment people to take a piece of that and invest it so that they can get some interest on the return. And that’s one of the ways insurance companies make money is on the time value of money.

Alan Pierce:

I know that the premium that an employer pays can be based upon their actual losses. Is it also based upon the reserves that are on cases that haven’t been closed yet?

Michael P. Kelley:

So there are three major criteria that impact premium for workers’ comp purposes. The first one is for every $100 of payroll, an employer pays a rate based on the individual’s job, and every job is put into a classification. So for example, if I work in the office, I’m a clerical worker for every $100 of payroll in Massachusetts, my employer pays 4 cents. And the idea is most clerical workers don’t face a lot of physical hazards in their job. They don’t tendency to have a lot of injuries compared to a construction worker where they may be paying $22 per a hundred dollars a payroll because the risk is much higher. So we have the classification and the rates. The insurance commissioner of Massachusetts sets the rates per class and we multiply it per $100 of payroll. But for any employer that, and this is a ballpark over $5,000 in premium, part of the calculation includes their premium is modified based on their experience over a three year period of time.

It’s called an experience modification factor. And for example, if an employer is normal for their industry as it relates to the amount of losses they’ve had historically, their experience mod is a 1.00. So one, so you take the manual premium rates times the class, times the payroll, and I get a manual premium. Let’s say it’s $10,000. Well, if my losses over the last four years have been better than normal, my multiply might be a 0.8 or a 0.75. So I get a discount. So I don’t pay $10,000, I pay $8,000. However, if my losses have been higher than expected for my industry over the last four years, then I might be a 1.2 or a 1.3. And depending on the size of a company and the type of losses they have, that multiplier can get pretty big. I’ve seen one as high as 6.25. I’ve seen a couple over two, but that’s very rare. Usually they run somewhere between 0.8 and 1.3.

Alan Pierce:

So there is an indirect correlation between the cost of an individual claim and the premium that employer might pay because a lot of times my clients who may have a family relationship with the employer or very close relationship sometimes are fearful for bringing a claim because it’s going to hurt their employer’s premium. And I try to explain the way you’ve explained it, how it may or may not affect their premium. It depends on how many other cases they’ve had or may have in the future, and their case may not affect it at all. Am I correct? I mean, was that kind of a

Michael P. Kelley:

Good Yeah, probably the simple analogy is your auto insurance, Allen, the more losses you have, the more you’re going to pay. So the same thing for employers if they have either a frequency or a severity issue. So a lot of claims or big claims that’s going to impact what they pay going forward.

Alan Pierce:

We’re going to take another break and when we come back, we’re going to talk to Mike about settlements of cases and structured settlements and any other issues about modern case handling and claims handling as opposed to the way it used to be. So we’ll be right back

Judson Pierce:

And we’re back, Michael. How do claims representatives really price a case for settlement and what are structured settlements and how can they be beneficial?

Michael P. Kelley:

Well, in workers’ compensation claims, as I mentioned earlier, the objective of the adjuster is to bring the claim to conclusion. The best way for an adjuster to do that is to work with the injured worker and their medical team to get them to a point where they’re physically capable of returning to their old job at their old level of pay. And that’s the best scenario that the person goes back and they can be productive going forward. Well, sometimes individuals are injured to the point where they can return to their prior employment and can’t make the money that they used to make. And in cases like that, and again, depending on the jurisdiction, some jurisdictions will allow the insurance company and the employee usually represented by a plaintiff attorney to negotiate a settlement. Massachusetts, and in most states we call that a lump sum settlement, and it’s really trying to close out the benefits that an employee is collecting and what they may be eligible to collect going forward.

So I’m buying away future exposure if I settle a case. And so what I need to do is I need to look at what are the things that go into determining the future exposure. In most jurisdictions, you’re allowed a certain number of weeks of disability, whether it be temporary total, temporary partial, a permanent partial. And if I had those exposures looking ahead of me as an adjuster, what are they worth? And usually they’re paid over a period of time. So if I have five years worth of future exposure, what is the rate? If it’s a thousand dollars a week, it’s $52,000 a year times five is $260,000. That’s my exposure on the case. I would probably add something for the permanency in this jurisdiction. And again, that’s much more defined based on the charts that we use for that. But what would I pay somebody to get away from that exposure?

It doesn’t make financial sense to the carrier to say, here’s a check for $260,000. If they get to pay it over a five year period of time, the current interest rate is about 5%. The insurance company could put that money in the bank and collect 5% for the next five years and still pay the same benefits. So there would have to be an incentive for the carrier to do that. And typically, well give me a discount. What’s the present day value of that money over a period of time? Then the next issue is from an justice standpoint, do I really think the person’s going to stay out of work for the next five years? Do they want to get back to work? What is their age education? Are they at retirement age? What are their transferable skills? What’s it going to cost me to take an ion worker to train him to be the photocopy repair man? And what wages will he or she be earning if we put them in that job compared to being an iron worker, if it’s less, they’re eligible for benefits and we got to take that into consideration.

Alan Pierce:

Alright, and structured settlement, which usually comes about when it’s a much higher value case, a much higher exposure case structured settlement, just sort of defined for us what that is as compared to a strictly cash lump. Somewhere in exchange for $50,000, the injured worker gets a check.

Michael P. Kelley:

So the concept is instead of giving somebody a wheelbarrow full of money, the insurance carrier agrees to pay them certain funds over an extended period of time. So I gave the example of somebody collecting $52,000 a year for the next five years, so a total of two 60. If I could go to the injured worker and say, I tell you what, I’m going to give you $60,000 a year, but I’m going to pay it once a year, $60,000 a year for the next five years, would you take that instead of the two 60 in exchange me not present day value? If the guy, gee, that’s a pretty good deal. I’m 60 years old, I’m going to be 65 in five years, I can collect social security that works for me. And I don’t want to say the trick to it all is the insurance company doesn’t pay $260,000 for that settlement. They would go to an annuity company that would say, we’re going to charge you $240,000 to make those payments over the next five years for you. So they’re saving some money on it. So it’s really a win-win. The injured worker gets their money over a period of time, and it’s typically a little bit more, the insurance company pays a little bit less and the claim is brought to a conclusion, which is my objective.

Judson Pierce:

How do you feel, Michael, about other structure companies getting involved that may or may not be the insurance company preferred one, but say something chosen by the employee?

Michael P. Kelley:

Everybody has their favorites. I’ve had somebody that I’ve worked with for 40 years doing structured settlements. He’s a former claim rep and I have a great deal of respect for him, and he knows his job. A lot of ’em are, it’s like a life insurance salesman. I don’t know that I trust them. So it’s really just who the individual is and how much faith do I have in them and can we get the deal done? Do they have the markets to do that? And typically, this is not something that, it’s not an insurance company product. It is a private insurer that’s not associated with the workers’ comp carrier that you’re buying the annuity from. So the carrier is just really trying to figure out what’s the best way to bring this to conclusion. And I’m a big fan, especially in survivor claims or fatality claims where you have young children and I don’t want them to get a bunch of money when they’re young and have it be blown on ’em. I want it to be there for their whole life. And I’m a big fan of structured settlements on claims where people have a long way to go to collect their funds.

Alan Pierce:

And before we conclude, and I know this probably would take up another podcast, but you mentioned artificial intelligence earlier. How do you see that changing the claims handling process? How has it, and what do you think the genie’s out of the bottle, where do you think it’s heading in terms of actually the role of an adjuster in pricing a case or setting a reserve? Will that be done by machines?

Michael P. Kelley:

Artificial intelligence? To me, at least, the way I look at, and again, I’m an old timer, I’ve been doing this for 42 plus years, is no different than technology was 30 to 20 to 15 years ago. We used to do everything by paper. We had claim files stacked on our desk. We took notes and we wrote them into the paper files. Now we do everything on a computer. It really helps me do my job much more efficiently that I can just put a name into a computer and all the information pops up, all my notes are there, all the historical information is there. And I see AI acting as a similar way just furthering technology for an adjuster. And twice this week, I’ve seen announcements by large carriers that basically say we’re bringing AI into our process. And if you, Mr. Employer, want a summary of an open claim, you go into our website, you put in your code and you press a button that says claim summary.

And AI is the one putting that report together. And they publish a three or four page report very detailed on the history of the claim, the benefits that have been paid, the benefits that are exposed. And that’s something that an adjuster would have to do right now, probably take ’em 30 minutes to an hour and a half to do. It’s going to be done in 30 seconds. So I see it helping them from an efficiency standpoint. But the thing you don’t want to do, which is what technology has done in some cases, is take away that personal contact. Whatever we do for ai, we need somebody overlooking it. We don’t want the machines telling us what to do. And I’ll give you an example, Alan, to me, we talked about reserving earlier. To me, reserving is a knot. It is not a science. You need to look at every aspect of a case.

Historically, insurance companies have said, well, I can pump all the information into my computer and it’ll tell me what the reserve should be on a case. Well, I disagree with that. I think you need to, okay, what am I dealing with? Do I think this person is going to be able to stay out of work for five years? What are their health issues? What are their comorbidities? Are they going to be able to sit home and not work without going stir crazy? So there’s a lot that goes into it. So we need to make sure that we guard against over technology, but also at the same time, we want to embrace it to make our lives more efficient, more effective, and better for everybody. We want to take care of injured workers, we want to take care of employers. And that’s part of the process. That’s the grand bargain as my friend Alan Pierce always said,

Judson Pierce:

That is the grand bargain. Indeed. Michael, I just wanted to take this opportunity to thank you for coming on our program. Thank you for being such an instrumental force in the realm of workers’ compensation here in Massachusetts and across the country for so many years. And your wealth of information today is definitely appreciated by all of us here at Workers Comp Matters. So I’d like to thank you again and thank you, our listeners for tuning into another edition. We’ll speak soon. And remember, make it a day that matters. Take care.