Workers’ Compensation Insurance – SIB Whitepaper
Workers’ Compensation Insurance Audit: What your insurance company doesn’t want you to know about its annual audit
Every year, your insurance company audits you.
You can – and must – audit them in turn.
Facility expenses, equipment, overhead costs, payroll, insurance – the cost of doing business can loom large over a company of any size. But you don’t have to accept rates and programs as non-negotiable. Many ostensibly static or inevitable spend areas can be audited for better rates, optimally structured contracts or service levels, and the correction of billing errors.
This whitepaper will discuss workers’ compensation, an expense frequently perceived to be outside of employers’ control. Providing workers’ compensation has become an especially dreaded cost for employers because insurers have the capacity to charge exorbitant adjustments to premiums long after a policy’s effective date has ended, rendering the initial cost of a policy essentially meaningless and its real cost at the time of purchase impossible to fully determine. A legacy of shock audits – retroactively adjusted premiums astronomically higher than a policy’s initial cost – has caused employers both small and large to feel powerless, subject to seemingly arbitrary costs for policies that have long since expired. This paper will demystify the auditing process that leads to such overwhelming and unwelcome surprises by way of leading to an empowering suggestion: to protect yourself, you must audit your auditors. It is vital that you understand how insurance companies conduct their reviews of your business to maximize their potential extractions for workers’ compensation premiums. You can, in turn, carefully review their actions and potentially save your company millions. Superficially at least, workers’ compensation is a spending area that seems to have largely been taken out of the control of employers, easily manipulated by sophisticated insurance procedures and the enormous resources of the powerful companies enacting them. But you will learn that a proactive outlook and a full awareness of the audit processes of insurers can arm you with the assurance that you are being audited properly and can eliminate the worrying specter of a major future shock.
The basics
The cost of insuring your business, especially workers’ compensation costs, can be harrowing. You may have every safety measure and OSHA standard in place to protect your employees, but you’re still required to carry insurance – even if you’ve never had a claim. Each year, workers’ comp insurers return to audit your payroll, your experience modification factors, and your use of outside contractors to ensure that your current policy is adequate for your business and to make sure you paid enough for the prior policy year. These audits are often complicated and time-intensive for the team that needs to prepare the necessary information – frequently a team that should be focusing on much more mission-central work – and cases abound in which burdensome additional premiums have been owed long after a premium’s original policy year has finished.
There are steps you must take to ensure your rates remain as low as they can be while still adequately protecting your company. This fact is especially true if you have a complex payroll. Insurance auditors first look to adjust your premium by placing your employees into hundreds of risk categories correlated with the work they perform. The maneuvering of even small sets of employees from one category to another can cause dramatic shifts in what you owe to insure them. Rationales for such decisions can be tenuous, to say the least. In one instance, a clerical worker was shifted to the same risk category as machine-floor workers because she walked past the machines they worked with on her way into and out of the building every day.
Such a dramatic misrepresentation highlights both the pitfalls and the opportunities inherent in a workers’ comp insurance audit. You can easily fall victim to extreme, detrimental assessments of your workplace; and insurance companies litigate intensively to enforce their conclusions. But if you are adequately prepared, you can give yourself the tools to ensure that your policy is fair and accurate. The savings from taking such a proactive stance, especially if your operations extend into multiple states and involve many types of workers, can be enormous.
Consider the experience modification rate (EMR) – an actuarial tool that estimates the risk your operations pose to employees, usually based on your payroll and on three years of past incidents. Increasingly, this rate is significant or preeminent in determinations that lead to securing bids and contracts in competitive industries. In most states, an EMR is calculated and authorized by a not-for-profit bureau formed by the insurance industry, the NCCI (National Council on Compensation Insurance). But not in all states: many have their own ratings systems, and a slight adjustment – or even the various ratings bodies’ differential responsiveness to correcting an error or oversight – can completely remake a firm’s prospects in a bidding industry. Utilizing discrepancies in the ratings produced by different rating bureaus in the various states where a firm’s operations take place can thus lead to drastic advantages – and, because the modification is also a multiplier directly tied to your premiums, drastic savings.
The EMR also exemplifies obfuscation strategies that the insurance industry uses to take the audit process out of its policyholders’ control. The term’s usage is wide-ranging and varied; and another common phrase (experience modification factor or EMF) refers to an identical tool. Technical-seeming or disparate terminology can confuse and disempower a team if it is unequipped to parse it. Inform yourself before your audit begins, bringing on supportive external help when necessary.
The annual audit: What is the insurance company looking for?
Insurers have many tools at their disposal to maximize their billing, most potently by misrepresenting your payroll and work environment, and, just as devastatingly, by using their immense resources to file suits for the payment of erroneously calculated premiums.
Your annual workers’ comp audit is, at face value, a standard procedure for the insurance company to ensure that the rates and coverage set forth in the original policy are still enough to protect your company and to protect themselves. However, insurance companies vary widely – and individual insurers vary from year to year – in the aggressiveness with which they seek to maximize their remuneration for already-expired policies. The auditor will dig into your HR records to analyze:
1.Payroll – does your reported payroll for the prior year match the estimated payroll used to generate the policy estimates? Have you grown or reduced your staff size, altered the compensation structure for your employees, or changed ownership or operations?
2.Class codes – are your employees properly classified into the job codes that match their roles? For example, is your administrative staff assigned to a lower risk class code than, say, your in-house maintenance department or equipment operator? The riskier the job role, the higher the premium will be for that particular class.
3.Experience Modification Rate – The EMR is a gauge of the cost of a company’s workplace injuries over the past three years and is used to estimate the future chance of risk. Again, despite discrepancies in various states’ calculation of this number and a flawed oversight process in the reporting of numbers that determine it, EMR has increasingly become a standard measure for pricing workers’ comp coverage. An EMR of 1 is considered average and will result in no modification to your premium; claims drive this number up. Because three years of incidents go into the calculation of your EMR, a claim will increase your premium for several years after it is filed. Thus, because the EMR acts as a multiplier for premiums, an increase can drastically impact what you pay – and a decrease based on vigilant oversight of your audit will produce concomitantly large savings.
4.Contractors – did outside contractors engaged during the prior year have their own workers’ comp policies in place? If they didn’t – or if you don’t know – you may end up paying for them retroactively on yours.
5.Other sources – Insurers will use all of the tools available to them to reinterpret your workplace. This includes company websites and outside references to a company’s operations. Any discrepancies between such materials and the documents used to generate your estimated premium (the initial cost) may be exploited to the insurer’s advantage. You must be prepared to explain or defend any potential discrepancies.
Once the insurance company completes its annual review, it will present its findings in the form of adjusted premiums for the upcoming year and a bill for additional premiums based on the prior policy year. Consider: has your bill ever gone down without a reduction to your headcount?
Audit the auditor
You have a right to question the insurance company’s classifications and policy structure, and, at the very least, to rigorously search for abnormalities and calculation errors. Every year your insurance company audits you – turn the tables and audit them in turn. In fact, in some states you can reverse additional charges imposed on your company up to five years after they occurred.
The first step in any workers’ comp audit for a successful subsequent re-audit of the insurer is to be prepared. Have your payroll and tax records ready, as well as a full understanding of the classification codes that apply to your business for each department. Develop a firm understanding of your company’s use of subcontractors and their adherence to their own workers’ comp guidelines. Review all non-HR materials that the insurer might additionally review in an attempt to redefine your operations and employee codes, such as company websites, prospectuses and promotional materials.
Be especially prepared for an in-depth review of payroll and classifications. Individual employee calculations are based on a rate per class code multiplied by every $100 of payroll. A clerical worker may have a rate for his class of $0.15 per $100 and a warehouse employee may have a class code rate of $7.53 per $100. If each of those employees earns $40,000 per year, this translates to annual costs of $60 to cover the clerical worker and $3,012 for the warehouse employee, assuming no claims have been filed. With the addition of administrative costs, higher premiums based on a higher EMR, and classifications of hundreds or thousands of employees, a company will face very tedious calculations with ample space for large degrees of error. A few misclassified or miscalculated employees can cause thousands of dollars of increases to your annual premiums.
Review your original policy, which was based on an estimate. Were your officers excluded from the original policy and are they now showing up post-audit? Is your EMR higher than it used to be, even though you’ve had no claims or more than three years have passed since the last one? Is the structure of your business – or how you’ve structured it on your policy – different from your original assessment? Were you given credits on your original policy that aren’t being credited now? Are employees assigned to more than one classification code when they shouldn’t be? (Note: some should be.)
Misclassifications and miscalculations – whether based on improperly organized processes on your end or human error on the part of the insurer – will cost you. You need to familiarize yourself with the code system specific to your state, NCCI or otherwise, to determine what each of your employees should cost and maximize your potential for savings. Moreover, not all NCCI states interpret their codes in the same way. In some NCCI states, someone who surveys roofs from the ground will be classified under a code identical to that of workers doing roofing themselves – a much more dangerous task. There is room for maximizing your savings if you understand your state’s history of reading classification codes.
Depending on the size and complexity of your business and specific regulations in your state, you may have dedicated staff that not only prepares for annual audits but is also responsible for questioning the results. Otherwise, companies may, and should, engage third party experts to handle this monumental effort for them. Outside help may be especially useful in keeping abreast of changes in the practices of the insurance industry, which are common and can be used to your advantage. Formulas for EMR calculations, for instance, have undergone recurrent changes, including a dramatic change to the NCCI’s formulas recently.
Can you win?
Once you start looking, you’ll find your fair share of horror stories – or you may be one yourself and find that you’re not alone. But there are also plenty of success stories. You can and should be one of them.
For example, a hotel group with properties in several states – including the major markets of New York, Chicago and Washington, DC – was reeling from more than $2 million in annual workers’ comp premiums. The group enlisted a third-party expert to perform an audit of the insurance company’s annual review.
Restructuring the policy to be most advantageous for multiple locations, reviewing the EMR across its properties, combing through class codes, and analyzing payroll yielded enough disparity to question the findings of the insurance underwriters. The hotel group ended up saving more than 25 percent – over $550,000, made up of nearly $300,000 in refunds and $250,000 in annual go-forward savings for next three years.
Results like these are not atypical, with annual savings often 25 percent or higher. Companies with more risk, like those in the construction or manufacturing industries, are more likely to find savings with a deep-dive analysis of classification codes, while companies of all types can benefit from understanding and fruitfully disputing EMRs. You can be a success story, too. Question the insurance company and audit the auditor each year to make sure your premiums are fair and accurate.
Don’t be afraid to look outside of your organization for help
For projects as complex and fraught as workers’ compensation audits, proper third-party help can be not merely beneficial but an essential component in your organization’s strategy. Instead of diverting your personnel from their critical work and allocating costly resources for their training in a new and unwieldy topic, outside groups can properly assess your audit in the manner outlined above with little effect on your typical operations. They provide insight and expertise that likely will not be readily available among your existing workforce. Nor should they be: it is far more efficient to get proper external help to tackle this complicated process.
A hallmark of good external consulting is that it should cost you nothing upfront and nothing if it does not succeed in the purpose for which you are acquiring it. High-quality third-party experts in the domain of workers’ comp insurance will know exactly where your operations stand in the shifting legal and institutional frameworks of your insurer, your policy, and your premium. They will have access to large bodies of data that situate your organization and your insurance costs among those of thousands of others – not necessarily in your industry – to determine exactly what your coverage should and should not include. And unless you see significant savings, they will not exact charges for their services.
This whitepaper is sponsored by SIB Fixed Cost Reduction. SIB specializes in reducing monthly expenses for companies with multiple locations. Unlike other companies, SIB only bills based on the savings it finds, and clients are not billed until savings are realized. SIB has analyzed over $2 Billion in spend across more than 45,000 locations nationwide. This expertise allows SIB to effectively rectify billing errors and negotiate lower pricing for its clients – without changing their vendors or service levels – across a variety of spend categories, including telecom, utilities, waste removal, workers’ compensation, employee benefits, bank fees, maintenance contracts, and more.
SIB Fixed Cost Reduction
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