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Workers’ compensation and premium audit. Daniel E. Montembeau, CIPA, CPCU Director of Premium Accounting and Audit. Reasons for Premium Auditing. Determine the correct premium Collect rate making data Meeting regulatory requirements Deterring and detecting fraud

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Workers’ compensation and premium audit


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    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.