North Dakota’s Workforce Safety & Insurance (WSI) Board of Directors has voted to adopt a 5 percent discount in calculating the WSI reserve fund. The Board also recommended that $250 million be held for unexpected developments in the future.
The reserve fund is the money set aside to cover the cost of all current workers’ compensation claims. The dollars set aside in the reserve fund pay for both wage-loss and medical benefits to the injured workers of North Dakota , in the unlikely event that WSI would be dissolved. Some of WSI’s active claims stretch back into the 1930’s. The reserve fund is an estimate of what the cumulative future payments will be for all active injured worker claims.
“The action undertaken by the Board in no way affects the dollars being held for the injured workers of North Dakota,” said Bob Indvik, WSI’s Board chairman. “And this ensures a more consistent premium for North Dakota employers going forward.”
Previously, WSI’s Board had a goal of recording its reserve fund using an undiscounted method. At the request of the WSI Board, over the last several months, WSI staff consulted with its actuary and several investment experts to re-evaluate that goal.
The results of this comprehensive study reportedly indicated that using the discounted method for stating the WSI reserve fund would be more appropriate given the fact that WSI is the sole provider of workers’ comp in North Dakota.
And because of the long-term payment stream to injured workers, it would reportedly be reasonable to assume future investment earnings and use the time value of money when calculating the current needs of the reserve fund.
To determine an appropriate discount level, staff at WSI surveyed other states workers’ comp funds, consulted with a number of experts in investment cycles and evaluated the bond, treasury and equity market returns and WSI’s historical investment returns. The results indicated that a rate of 5 percent would be a reasonable rate of return over the long term.
In addition, because of the uncertainty inherent in estimating ultimate claim costs, WSI staff recommended that a surplus of 2 to 2½ times an average years’ premium be held in reserve for unexpected developments.
The WSI Board adopted this approach, and consequently, the total reserve amount today would be adjusted from approximately $1.1 billion to $910 million dollars ($660 million for the required reserve at a 5 percent discount plus $250 million for unexpected developments).
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