The Fourth-Quarter Reserve Request and the Star Performer Problem
You manage a 60-person claims unit at a third-party administrator. In mid-December, the vice president of claims asks you to hold a $4.2M reserve increase on a construction defect file until the first week of January, saying 'it's just timing, the money's the same, and we need the fourth-quarter combined ratio under 104 to hit the client's incentive.' The increase is supported by your supervisor's exposure analysis and a defense counsel report. Separately, your highest-profile adjuster, Dana, posts a 118-day average cycle time against a 165-day unit average and wins the quarterly award. A file audit shows her reopen rate is 28% versus a 9% unit average and that she settled 11 injury claims at 80% of her authority without the required supervisor review, which she describes as 'efficiency.'
1. How should you respond to the vice president's instruction?
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Decline, in writing, and offer an alternative. A reserve is an accounting estimate of probable ultimate cost; the obligation to record it when the information becomes available does not depend on the calendar quarter, and holding a known $4.2M deterioration misstates liabilities to the client, to regulators, and potentially to reinsurers and auditors. 'The money is the same' is exactly the problem: shifting it converts an estimate into a managed earnings number. Because the instruction came orally, send a brief memo restating the exposure analysis, the date it was received, and your recommendation to book the increase in the current period, copying the appropriate finance or compliance contact if your organization's escalation policy requires it. If the client's incentive fee is affected, disclose the conflict. Offer the legitimate alternatives: accelerate review of files with probable decreases, or confirm whether any portion of the $4.2M relates to a future period under the policy's coverage trigger.
2. What should happen with Dana's performance evaluation?
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Her numbers must be separated into the parts that are real and the parts that are artifacts. A 118-day cycle time with a 28% reopen rate and unreviewed settlements at 80% of authority is not efficiency; it is transferring cost into future periods and bypassing a control designed to protect the client. Recalculate her results on a quality-adjusted basis - count reopened claims back into her inventory and cycle time, and sample the 11 unreviewed settlements for adequacy against the unit's valuation guidelines. The conversation should be specific and evidence-based: the missing supervisory approvals are a policy violation regardless of outcome, and the reopen rate suggests underpayment or premature closure. Retain her, because the speed and the volume are genuine assets, but condition continued authority on compliance, add a 100% review of her settlements for 90 days, and change her award basis to include payment accuracy.
3. How should the unit's award and control structure change?
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Redesign so that no single metric can be won by cutting corners. Combine cycle time with reopen rate, audit payment accuracy, and reserve adequacy into a composite score, and publish the formula so adjusters can see the trade-offs. Make the supervisory approval threshold a hard system control rather than a procedural expectation - payments above the threshold should be blocked in the claims system until approval is recorded, which removes the discretion that let Dana bypass review. Audit at least 10% of each adjuster's closures monthly and 100% of any adjuster whose reopen rate exceeds twice the unit average. Finally, address tone: the vice president's reserve request and the award to a noncompliant adjuster send the same message - results are measured at quarter-end, not at file level - and both must be corrected visibly for the control changes to be credible.