Workers’ compensation and premium audit

WORKERS’ COMPENSATION AND PREMIUM AUDIT

Daniel E. Montembeau, CIPA, CPCUDirector of Premium Accounting and Audit

REASONS FOR PREMIUM AUDITING

Determine the correct premiumCollect rate making dataMeeting regulatory requirementsDeterring and detecting fraudReinforcing confidence with insureds (Level playing field)Obtaining additional information for other departments

FUNCTION OF PREMIUM AUDIT

Maintain the integrity of the rating system

• Determine final earned premium

• Review of classification

• Review claims

THE 3 FACTORS THAT DETERMINE PREMIUM

1. Payroll2. Rates3. Classification Codes

FACTORS DETERMINING PREMIUM: 1. PAYROLL

Why Payroll?• Historically varies directly with loss exposure• All employees are paid• Employers are already required to maintain payroll records• Payroll records are less likely to be manipulated• Payroll can be reconciled with quarterly tax forms• Hours work differs drastically based upon exempt and non

exempt


Inclusions• Wages and salaries• Commissions• Bonuses• Extra pay for overtime, except premium portion• Holidays, vacations, periods of sickness, bereavement

and similar absences from work• Payments for work not based upon hours

o Piece work, Incentive plans, Profit sharing


Inclusions Continued• Payment allowances for tools• Value of apartment or house• Value of lodging, room & board• Substitutes for money• Value of meals• Employee contribution to 401k & cafeteria plans• Davis-Bacon and prevailing wages• Unsubstantiated expense reimbursement


Exclusions• Tips and other gratuities• Payments to group insurance and pensions• Special rewards for inventions or discovery• Severance pay• Payments for active military duty• Employee discounts• * Premium portion of overtime• 3rd party sick pay

FACTORS DETERMINING PREMIUM: 2. RATES

Rates• The price of insurance per exposure unit. For workers’

compensation “payroll” is the exposure unit

RATE X PAYROLL = PREMIUM

FACTORS DETERMINING PREMIUM: 2. RATES

National Council on Compensation Insurance (NCCI)• Rating organization for 37 States

o Loss costso Loss costs multiplier (LCM)

State Rating Agencies• Monopolistic• Competitive

FACTORS DETERMINING PREMIUM:2. RATES

Ratemaking goals: (Carriers)• Produce the correct rate per exposure unit• Produce stable rates• Respond promptly to changes in loss experience• Encourage loss control• Provide for profit and contingencies• Make ratemaking simple to understand and apply

FACTORS DETERMINING PREMIUM:2. RATES

State Rate Regulation:• Adequate Rates• Not excessive• Not unfairly discriminatory

FACTORS DETERMINING PREMIUM: 3. CLASSIFICATION CODES

Classification Codes• NCCI maintains class codes for 40 states. Scopes Manual• Code numbers similar nationally. Except (PA & DE)• Each state has minor exceptions approved by their

regulatory agencies, known as State Exceptions• 500+ different classifications


Classification Rules• The object of classification is to determine the one

classification which bests describes the operation• It is the business of the employer within a state that is

classified not the separate employments, occupations or operations within a businesso Services: Classify by what they do.o Stores: Classify by what they sell.o Manufacturing: Classify by what they manufactureo Construction: Classify by what they build or their trade


Classification Rules Continued• Standard Exceptions (similar among businesses)

o Clerical– similar to all industries due to strict definition– some classes will state “includes clerical”

o Driverso Outside saleso Auto sales persons


Classification Rules Continued• General Exclusions (not common)

o Aviationo Construction or alterationso Stevedoringo Sawmill operationso Employer operated daycare service


Classification Rules Continued• General Inclusions (common)

1. Cafeterias2. Manufacturing of containers for sole use, not for sale3. Medical facilities4. * Maintenance of building and repair of equipment5. Printing on one’s own product


Classification Rules Continued• Construction

o Home construction, (classify all operations)– Specialty trades can be separately classified.

o Different construction jobs can be separately classified.

o Division of an employee’s payroll permitted


Classification Rules ContinuedExample 1: Company Manufactures Machine Parts• Governing code is 3632- Machine Shop• Other codes which may apply:

o 8810- Clericalo 8742- Outside saleso 7380- Drivers


Classification Rules ContinuedExample 2: Residential Home Builder

o Governing code is 5645- Residential Carpentryo Other codes which may apply:

– 8810- Clerical– 8742- Outside sales

» Roofing Code 5645» Drywall Code 5645» Cabinets Code 5645» Electrical Code 5190


Classification Rules ContinuedExample 3: Actual Business

o What is the governing/ basic code?o Any special rules in the class code?o Any standard exceptions?o Any general exclusions?

THE PREMIUM AUDIT STEPS

1. Review classification2. Start with Gross payroll 3. Adjust for payroll exclusions overtime, tips etc.4. Tie out payroll to quarterly tax forms5. Separate out Standard Exception & Exclusions6. ** Review owner / officer status7. Review sub-contractor information8. Review Claims

FUNCTION OF PREMIUM AUDIT

Maintain the integrity of the rating systemDetermine final earned premiumReview of classificationReview claims• Make sure claims coded correctly (For rate making)• Make sure employees classified correctly (Claim vs. job duties)• Make sure claims properly assigned to correct insured

(Experience rating)

Questions?

Thank you.

Workers’ compensation and premium audit

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