Why Workers' Compensation Audits Are Important
Staffing & Workers' Compensation
Workers’ compensation policies are auditable, meaning that the policy is bound using a payroll estimation, and at the end of the policy period, an audit is required to determine the final cost of the policy based on actual exposures.
The data required as part of the audit process includes, but isn’t limited to:
- Detailed description of your business operations
- Payroll records including federal tax reports/941’s and state unemployment reports
- Employee records including number of employees, hours, days or weeks worked annually, payroll and overtime compensation, as well as a detailed explanation of the job duties for each employee
Often times an employer can be overwhelmed by the audit process and may think this is just another way for the insurance company to get more of their hard earned money. What many people don’t realize is the important role that accurate audit data plays in the overall workers’ compensation system.
Accuracy of Data Impact on Insurance Companies
The insurance company depends on accurate audit data to provide them with the correct workers’ compensation premiums for an employer’s actual exposure. Inaccurate audit data can impact future rate development and the analysis of their work process acceptability. But it’s bigger than just one employer. The data from each individual employer is aggregated for analysis and plays a large role in determining the future direction of an insurance company’s workers’ compensation program.
Accuracy of Data Impact on NCCI and Individual State Rating Bureaus
The National Council on Compensation Insurance (NCCI) and a handful of individual state rating bureaus are also driven by this data. Collecting and maintaining its accuracy is one of their most important tasks. This data helps determine the costs associated with each individual classification code. Payroll and claim data are then utilized by the rating bureaus to develop rates, loss costs, expected loss rates and other crucial factors used to support the entire workers’ compensation rating structure.
Accuracy of Data Impact on Employer Industries
Inaccurate payroll data affects not only the individual employer/insured, but can also cause industry results to be incorrect. This may increase the underlying loss costs and/or base rates utilized by insurance companies in determining premiums. If audits are incorrectly reported, the overall results may suffer, causing increases in rates that in turn could potentially cost the employers/insureds more over a period of time.
Accurate audit data plays an important role throughout many areas of the workers’ compensation system. Knowing the interests of all parties – from the employer to the insurance companies to the rating bureaus – can help put the importance of the audit process and accurate data collection into perspective.
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