Workers’ compensation and premium audit

1. Workers’ compensation and premium audit Daniel E. Montembeau, CIPA, CPCU Director of Premium Accounting and Audit

2. Reasons for Premium Auditing • Determine the correct premium • Collect rate making data • Meeting regulatory requirements • Deterring and detecting fraud • Reinforcing confidence with insureds (Level playing field) • Obtaining additional information for other departments

3. Function of premium audit • Maintain the integrity of the rating system • Determine final earned premium • Review of classification • Review claims

4. The 3 FACTORS THAT DETERMINE PREMIUM • Payroll • Rates • Classification Codes

5. 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

6. Factors determining premium: 1. PAYROLL • 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 • Piece work, Incentive plans, Profit sharing

7. Factors determining premium: 1. PAYROLL • 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

8. Factors determining premium: 1. PAYROLL • 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

9. Factors determining premium: 2. RATES • Rates • The price of insurance per exposure unit. For workers’ compensation “payroll” is the exposure unitRATE X PAYROLL = PREMIUM

10. Factors determining premium: 2. RATES • National Council on Compensation Insurance (NCCI) • Rating organization for 37 States • Loss costs • Loss costs multiplier (LCM) • State Rating Agencies • Monopolistic • Competitive

11. 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

12. Factors determining premium:2. rates • State Rate Regulation: • Adequate Rates • Not excessive • Not unfairly discriminatory

13. 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

14. Factors determining premium: 3. CLASSIFICATION CODES • 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 business • Services: Classify by what they do. • Stores: Classify by what they sell. • Manufacturing: Classify by what they manufacture • Construction: Classify by what they build or their trade

15. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules Continued • Standard Exceptions (similar among businesses) • Clerical • similar to all industries due to strict definition • some classes will state “includes clerical” • Drivers • Outside sales • Auto sales persons

16. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules Continued • General Exclusions (not common) • Aviation • Construction or alterations • Stevedoring • Sawmill operations • Employer operated daycare service

17. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules Continued • General Inclusions (common) • Cafeterias • Manufacturing of containers for sole use, not for sale • Medical facilities • * Maintenance of building and repair of equipment • Printing on one’s own product

18. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules Continued • Construction • Home construction, (classify all operations) • Specialty trades can be separately classified. • Different construction jobs can be separately classified. • Division of an employee’s payroll permitted

19. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules ContinuedExample 1: Company Manufactures Machine Parts • Governing code is 3632- Machine Shop • Other codes which may apply: • 8810- Clerical • 8742- Outside sales • 7380- Drivers

20. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules ContinuedExample 2: Residential Home Builder • Governing code is 5645- Residential Carpentry • Other codes which may apply: • 8810- Clerical • 8742- Outside sales • Roofing Code 5645 • Drywall Code 5645 • Cabinets Code 5645 • Electrical Code 5190

21. Factors determining premium: 3. CLASSIFICATION CODES • Classification Rules ContinuedExample 3: Actual Business • What is the governing/ basic code? • Any special rules in the class code? • Any standard exceptions? • Any general exclusions?

22. The premium audit steps • Review classification • Start with Gross payroll • Adjust for payroll exclusions overtime, tips etc. • Tie out payroll to quarterly tax forms • Separate out Standard Exception & Exclusions • ** Review owner / officer status • Review sub-contractor information • Review Claims

23. Function of premium audit • Maintain the integrity of the rating system • Determine final earned premium • Review of classification • Review 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)

24. Questions? Thank you.