The WCIRB is authorized by the California Insurance Code (11750.3) to perform inspections of the premises of any insured businesses for classification assignment purposes. (The terms of the policy contract designate the WCIRB as the insurance company’s representative to inspect and examine employer’s records.)
These inspections are done to ensure that companies report premium and claims cost data to the WCIRB using the proper classifications. An inspection is also conducted as a part of a test audit. Newly experience rated businesses are typically inspected within the year of receiving the experience modification. Follow up inspections are stated to occur thereafter every 4-6 years.
The Inspection Report will be issued and published; copies are automatically sent to the policyholder and the current insurance company. Once the Inspection Report is published, insurance companies must follow the assigned classifications except in several circumstances. If the company has filed and received approval to deviate from the classification and classification procedures in the USRP, they may have different classification assignments; however, they still have an obligation to report premium and claims data in accordance with the California Workers’ Compensation Uniform Statistical Reporting Plan. Other circumstances leading to the use of different or additional classifications being assigned at audit stem from: 1) undisclosed operations, 2) changes in operations or additional new operations, 3) changes in ownership, 4) Inspection report errors.
WCIRB Inspectors have been known to make mistakes, too. I have seen occasions where the business operations were misunderstood and an incorrect classification applied. I’ve also seen blatant errors in code assignments contrary to classification phraseology.
In addition to performing inspections, the WCIRB also conducts test audits of employers’ payrolls and the insurers’ audit of those payrolls. These are done to ensure audit accuracy, the proper reporting of exposure and the proper application of experience modifications. This is a premium audit quality control program which is beneficial to both the insurer and the insured.
Test Audit Errors
In 2012, the WCIRB pulled a random selection of over 3,000 audits conducted by Insurance Companies. 14% of those policies, over 400 individual files, were found to have errors! (This figure has been fairly consistent for reported periods.)
The most common errors fall into the areas of Payroll Differences (19%) and Classification Difference (78%) with the balance falling under the heading of Premium Invoice Differences. The biggest area of difference is in Classification Assignments. In 2012, classification errors broke down as:
- 26% of errors relate to the assignment of Standard Exceptions employees
- 23% of errors relate to classifications being added or deleted on audit
- 20% of errors relate to payroll being allocated/divided/segregated improperly
Auditors often refer to the Test Audit program and their individual results. While the bureau’s acceptable standard is a 10% error ratio, Expert Audit Services currently has a 0% error ratio – and we’re darn proud of it!