As rates firm, an audit review is essential

Ken A. Crerar, president/CEO of the Council of Insurance Agents and Brokers, notes, "We've been cautious up to now about declaring a market turn, but I think it's reasonable to say that the market has made a hard turn after two quarters of price increases and tighter underwriting." Based on a market survey for the first quarter of 2012, Workers' Comp rates were up 7.4 percent -- more than any of the other commercial property/casualty insurance lines.

This firming trend coupled with the impending rate changes by NCCI means that employers are pressing for reviews of their Workers' Comp audits, with an eye to reducing premiums.

Many employers do not realize that classification and Experience Modification calculation errors are rampant in Workers' Comp. Some common mistakes that Certified WorkComp Advisors have found include:

• Misclassifaction of employees. Workers' Comp classifications are based on job risks for the business as a whole. With more than 600 job classes that are updated regularly and differ from state to state, it is easy to see how audit mistakes and errors can occur.
• For contractors, separation of payroll was not allowed. Contracting is one of the rare situations where separation of payroll is allowed, but there are rigid requirements for recordkeeping. Failure to document the information properly will result in higher charges.
• Experience Mod factor is incorrect. An Experience Mod is based on the history and costs of injuries at a company and has a major affect on premium. If a Mod is 1.25, the premium is going to be 25 percent higher than a 1.0 Mod. The calculation of a Mod is so complex there are several factors that can be incorrect, including inadequate or excessive reserving, failure to credit subrogation recoveries to the business, or just plain clerical errors. When it is incorrect, it affects premium for three years. The Experience Mod is computed based on three complete years of loss data, ending one year prior to the effective date of the rating period. In most cases, employers are operating in policy year 2012 now, which will not be calculated into the Experience Mod until the 2014 policy year.
• Incorrect charges for independent contractors. This can be a thorny situation and a thorough knowledge of the rules governing independent contractors vs. employees is required. One Certified WorkComp Advisor (CWCA) saved a company over $475,000 when an auditor applied a new code on the policy at the time of the audit.
• Work is performed in multiple states. This is an extremely complex issue that requires an understanding of the Workers' Comp regulations in each of the states involved. CWCAs have saved clients thousands of dollars by finding errors in how the premiums are calculated.
• Closed claims are appearing on your reserves. Claims that have been closed but remain open on the books often have high reserves that factor into the calculation of the Experience Mod.

While the annual Workers' Comp audit can result in unpleasant surprises, few employers treat it with the same concern that they would treat an IRS audit. Advanced planning is the only way to ensure an error and overcharge free audit.