An IW incurred $600 in medical in 2004, $1,200 in 2005 and $800 in 2006. How would you reserve for the medical expense?

An IW incurred $600 in medical in 2004, $1,200 in 2005 and $800 in 2006. How would you reserve for the medical expense?

• A. $800 a year
• B. $870 a year
• C. $1,000 a year
• D. $1,200

Answer: (B)

Reserve for medical expenses is often based on a three-year rolling average to smooth year-to-year fluctuations. Take the incurred medical costs from the last three years: 600, 1200, and 800. Add them up: 600 + 1200 + 800 = 2600. Divide by 3 to get the average: 2600 / 3 ≈ 866.67. Rounding to the nearest ten gives 870. Therefore, setting aside about 870 per year best reflects the average medical cost over the period. The other options either use a single year, which ignores variability, or don’t reflect the averaged value.

Reserve for medical expenses is often based on a three-year rolling average to smooth year-to-year fluctuations. Take the incurred medical costs from the last three years: 600, 1200, and 800. Add them up: 600 + 1200 + 800 = 2600. Divide by 3 to get the average: 2600 / 3 ≈ 866.67. Rounding to the nearest ten gives 870. Therefore, setting aside about 870 per year best reflects the average medical cost over the period. The other options either use a single year, which ignores variability, or don’t reflect the averaged value.