Workers' Compensation: Audit of Exposure Base & Classification Review

MARCH 7, 2023

Businesses are often overcharged for workers’ compensation coverage due to mistakes in how employees are classified or errors in reported payroll. USI Insurance Services’ audit of reported payroll and classification review helps prevent these mistakes and allows us to recommend more appropriate classifications. This process can help:

• Reduce the likelihood of additional premiums due at audit
• Determine if any premiums can be refunded from previous policy years
• Increase access to more competitive carriers
• Uncover opportunities to reduce premiums by up to 30%

Job Classifications

Workers’ compensation premium calculations begin with the classification of job functions and the payroll exposure associated with those classifications. Each classification carries its own rate, and most organizations require more than one to represent their operations accurately. USI’s review process often uncovers that businesses have been erroneously assigned class codes that carry higher rates than they should be charged based on the true nature of the work performed by their employees.

This problem is complicated by the fact that companies’ operations often change as they grow and their business models evolve. Agents and brokers tend to roll over classifications and payroll exposures from previous years without accounting for these changes, which can lead to potential problems.

Many insurance agents apply classifications based only on their titles instead of using more precise definitions as published by the National Council on Compensation Insurance (NCCI) or independent state workers’ compensation bureaus. USI associates have access to the same manuals utilized by auditors and underwriters to determine classification, which we use to identify errors in classification structure and advocate for corrections on behalf of our clients.

Classification Review Example:
After reviewing a general contractor’s operations, we discovered the company was performing both new construction and remodeling. Many of the remodeling jobs involved only light interior carpentry, yet all the payroll was being assigned to the higher-rated new construction work. By adding the interior carpentry work classification and reallocating the payroll as appropriate between the two codes, the company was able to reduce its premium by 19%.

Payroll Exposure

Workers’ compensation exposure is always based on payroll. Even when a company’s operations are correctly classified, we often discover errors in how payroll is reported. Certain portions of payroll may be excluded from premium calculations, or subject to limitations. For instance, payroll for owners and executive officers is capped at a maximum value, which varies by state. The additional pay awarded during overtime hours beyond the normal hourly rate can be excluded.

Audit of Exposure Base Example:
USI worked with a metal products manufacturer that had recently acquired a nearby competitor and was concerned about the high cost of their workers’ compensation coverage. Upon examining their policy, we found that the incumbent insurance broker had simply copied the payroll estimates from the acquired competitor without validating their accuracy. This led to the manufacturer including extra pay from overtime hours in their payroll estimates, which could have been excluded from the premium calculation.

After sharing our findings, the company agreed to name USI as their broker, and we worked with their workers’ compensation underwriter to correct these issues. This allowed the insured to realize a premium savings of roughly 11%.

Most brokers don’t invest the time or resources necessary to conduct regular workers’ compensation classification reviews or reported payroll exposures, which can lead to increased premiums.