W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a ® Preparing for the Workers Compensation Premium Audit Brian Gray Quality Assurance Director WCIRB California IIABCal InsurFEST Rancho Mirage, CA October 26, 2013

Notice The information provided in this presentation was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) solely for the purpose of discussion during this presentation. The WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this presentation Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, eSCAD and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRBs prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies.

Purpose The purpose of this presentation is to provide a basic overview of the workers compensation premium audit process. This presentation covers the following topics: Definitions – Physical and Voluntary Audits Why is an Audit Required? Role of the Premium Auditor Records Required for the Audit California Test Audit Program Audit Dispute Procedures Audit FAQs References & Resources

Physical and Voluntary Audits Audit A report of the policyholders exposure by classification that is based upon either an auditors examination of the policyholders books of accounts and original payroll records or upon a signed payroll statement obtained from the employer. Physical Audit An audit of payroll, whether conducted at the policyholders location or at a remote site, that is based upon an auditors examination of the policyholders books of accounts and original payroll records (in either electronic or hard copy form) as necessary to determine and verify the exposure amounts by classification.

Physical and Voluntary Audits Voluntary Audit An audit of payroll that is based upon a signed payroll statement obtained from the employer.

Final Audit – A Provision of the Policy Contract When an employer obtains a workers compensation insurance policy, the policy includes contract provisions that allow the insurance company, its representatives, or a rating authority, (e.g.: the WCIRB), to examine and review their company records. Language from policy contract: An examination and audit of all records relating to this policy will be performed within three years after the policy period ends. Information developed by audit will be used to determine final premium. Insurance rate service organizations have the same rights we have under this provision.

Why is an audit required? (Part 1) A workers compensation policy is normally effective for one year and the estimated premium is based on the annual payroll that is anticipated at the beginning of that year. The final audit is the process that calculates the final premium, as the actual payroll during the policy period may be higher or lower that the estimated payroll amount. The audit may result in a refund or additional premium due.

Penalties for Audit Refusal – part 1 Insurance Code If an employer fails to provide access to its records to enable the insurer to perform an audit, the employer shall be liable to pay to the insurer three times the insurers estimate of the then-current annual premium, plus expenses incurred by the insurer in trying to complete the audit. The insurer shall follow regular and reasonable rules and procedures to notify employers of their duty to provide for access of records, and to contact employers to make appointments during regular business hours for that purpose.

Why is an audit required? (Part 2) Insurers are required to submit all payroll and claims data for each policy to the WCIRB. The WCIRB is the insurance commissioners designated statistical agent. Each policy producing a final premium of $10,000 or more shall be subject to a physical audit at least once a year. Each policy insuring the holder of a C-39 license from the Contractors State License Board, (Roofing contractors), shall be subject to a physical audit at least once a year.

Penalties for Audit Refusal – part 2 Experience Rating Plan section III, Rule 3 For experience rated employers: Rule 3 requires employers to cooperate with an audit within 60 days If the insurer advises the WCIRB that the employer will not permit an audit, the WCIRB writes to the employer, advising that this will impact their experience modification calculation Unless audited, the experience modification will be calculated excluding the payroll, but including the claims losses, for the subject policy

Role of the Premium Auditor Audit the payroll records of the employer to determine the chargeable payroll exposure Determine the correct classification(s) for the business Ensure that employees are assigned to the correct classification Both payroll and claims assignments must be verified The audit will be used to: Determine the correct amount of premium due for the policy period Determine the payroll and loss data that will be reported to the WCIRB

Payroll: The Monetary Value for which Service is Recompensed Exposures = payroll Workers compensation insurance premiums are based on payrolls. Payroll records are required for the policy term. Payroll (remuneration) includes gross wages, salaries, commissions, bonuses, vacation, holiday and sick pay, overtime payments, the market value of gifts, and all substitutes for money earned during the policy period by all employees and officers of the employer. Therefore, the auditor reviews records for all types of compensation earned by all employees.

Records Required for the Audit Payroll records Summarized records may need to be reconciled against source documents Employee records Detail of job duties for each employee Employees may be summarized by classification or department Duties for individual employees may be verified, to validate summaries Cash disbursement register, 1099s & W-2s May be used to identify payments for casual labor, subcontractors, off-payroll payments to employees

Records Required for the Audit Federal and/or State Quarterly Returns 941s & DE-9s Used as a payroll verification source Other types of compensation: Tips (excluded) Severance Pay (excluded) Bonuses (included) Market value of employer-provided housing (included or excluded dependent on type of business operated) Additional records may be needed for specific industries Job samples Invoices, gross receipts

WCIRB Test Audit A Test Audit is an independent verification of an insurers final audit by the WCIRB. Test audits are performed by the WCIRB to conform with California Insurance Code (CIC) § (f). This section of the law prescribes that the WCIRB shall initiate test audits of insured employers' payrolls and insurers' audits of those payrolls to check the accuracy and reliability of insurer audits, and to examine all records relative to insurers' audits and premises of insured employers for ensuring the accurate reporting of exposures.

Audit Dispute Procedures Because the audit process may lead to premium adjustments, questions and disagreements can result. Agents or brokers may be able to resolve the issues Every insurer is required to have an appeals process in place to resolve audit disputes. The appeals process is explained in a mandatory policy endorsement Contact names and addresses, deadlines and other relevant information is provided Formal process of complaint escalation, culminating in an appeal to the insurance commissioner.

Frequently Asked Questions Question: I have a small business with a premium less than $10,000, but the insurer wants to perform a physical audit – can they do this? Answer: Yes. While some policies under $10,000 are eligible for a voluntary audit, not all are eligible, and the USRP directs that each policy producing a final premium of less than $10,000 shall be physically audited at sufficient intervals to ensure determination of proper payrolls.

Frequently Asked Questions Question: I have a store selling a variety of household merchandise, and the auditor is asking for information about my sales percentages in categories such as floor coverings and furniture. I thought this was just a payroll audit, why are they asking these questions? Answer: The auditor is asking these questions to ensure that your store has been assigned to the correct store classification. The USRP contains a number of store classifications, and has a provision that If a store sells more than one type of merchandise, each of which may be subject to a different classification, the store classification shall be determined based on the highest rated category of merchandise sold, provided that category exceeds twenty-five percent (25%) of gross receipts.

Frequently Asked Questions Question: An auditor called me to set an appointment, so I gave him the name and number for the bookkeeping firm we use. Now he also wants an appointment to come to our actual business location – do we have to allow this? Answer: Yes, this is part of the premium audit process. A site visit or inspection is often necessary to validate the classifications that have been assigned to the overall business operations and, in some cases, specific departments or employees.

Frequently Asked Questions Question: We did not like the insurance company we used last year, so we changed to a new insurer. Now last years company wants to do an audit – do we have to go along with this? Cant they just bill us based on what we reported? Answer: The policy contains contract provisions that allow the insurer to complete an audit within 3 years of the end of the policy. If an employer does not permit the audit, the Insurance Code states the employer is liable to pay to the insurer three times the insurers estimate of the annual premium, plus expenses. If the employer has an experience modification, it will be calculated using all of the losses but none of the payroll for this policy.

Frequently Asked Questions Question: I gave the auditor a workers comp summary that has our entire payroll sorted by department and classified, but now she wants to ask me questions about the job duties of individual employees. Cant she just use the report I gave her? Answer: The auditor needs to validate that the report was prepared and employees were classified based on the applicable USRP provisions. In most cases auditors can perform spot checks to ensure that the information summarized by the employer can be relied upon to produce an accurate premium audit.

References & Resources California Insurance Code California Workers Compensation Uniform Statistical Reporting Plan1995 California Workers Compensation Experience Rating Plan1995

W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a ® Preparing for the Workers Compensation Premium Audit Brian Gray Quality Assurance Director WCIRB California IIABCal InsurFEST Rancho Mirage, CA October 26, 2013