WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015

Transcription

1 Workers Compensation Insurance Rating Bureau of California WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015

2 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Notice This WCIRB California Test Audit Program was developed by the Workers Compensation Insurance Rating Bureau of California for the convenience and guidance of its members. It does not bear the official approval of the Insurance Commissioner and is not a regulation Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted in this copyright notice or by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Each WCIRB member company, including any registered third-party entities, (Company) is authorized to reproduce any part of this work solely for the following purposes in connection with the transaction of workers compensation insurance: (1) as necessary in connection with Company s required filings with the California Department of Insurance; (2) to incorporate portions of this work, as necessary, into Company manuals distributed at no charge only to Company employees; and (3) to the extent reasonably necessary for the training of Company personnel. This reproduction right does not include the right to make any part of this work available on any website or on any form of social media. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com. WCIRB California

3 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Table of Contents Table of Contents Part I Test Audits of Payroll Reporting 1 A. Purpose 1 B. Monthly Selection of Risks Payroll Audits 1 C. Test Audit Procedure Payroll Audits 2 D. Test Audit Standards Payroll (Physical Audits) 3 E. Special Test Audits Payroll 6 Part II Test Audits of Claims Classification 7 A. Purpose 7 B. Monthly Selection of Risks Claims Classification 7 C. Test Audit Procedure Claims Classification 8 D. Test Audit Standards Claims Classification 8 E. Special Test Audits Claims Classification 11 Exhibits 13 Monthly Selection Letter for Payroll and Claims Monthly Selection Letter for Payroll Only Monthly Selection Letter for Claims Only Notification Letter to the Employer Claims Classification Audit Results Sheet Test Audit Analysis Test Audit Report and Adjustments Quarterly Summary for Physical Audits Payroll Quarterly Summary for Physical Audits Payroll Detail Quarterly Summary for Voluntary Audits Payroll Quarterly Summary for Voluntary Audits Payroll Detail Quarterly Summary Claims Classification Quarterly Summary Claims Classification Detail WCIRB California

4 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Table of Contents [This page intentionally left blank.] WCIRB California

5 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Purpose Part I Test Audits of Payroll Reporting A. Purpose Test audits under Part I of this Program shall be conducted by the WCIRB for the following purposes: 1. To conform with California Insurance Code (CIC) (f), which prescribes that the WCIRB shall initiate test audits of insured employers payrolls and insurers audits of those payrolls to check the accuracy and reliability of insurer audits, and to examine all records relative to insurers audits and premises of insured employers for ensuring the accurate reporting of exposures and application of experience modifications, if any, by insurers pursuant to the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP); 2. To establish minimum auditing standards and to develop a program for monitoring insurer performance toward achievement of established standards; and 3. To improve audit proficiency through the evaluation of insurer auditing practices and the dissemination of beneficial information relevant to auditing procedures, training and materials. B. Monthly Selection of Risks Payroll Audits 1. All insurers participating in the Test Audit Program will be test audited on a continuous monthly basis. Insurer groups will be treated for all purposes as a single insurer. 2. Insurers must designate a primary authorized individual and if desired, a central address or alternative authorized individuals, for purposes of this Program. The following contact information shall be provided: name, title, mailing address and address. All usual and customary communication shall be performed electronically. The WCIRB s address is TestAuditProgram@wcirb.com. An insurer shall immediately notify the WCIRB of any change in the designated contact or contact information; failure to do so will not constitute good cause for purposes of waiving fines. 3. Insurers that are exempt from Part II of this Program will continue to be subject to Part I unless or until the Maximum Standard under Part I is achieved. 4. Monthly Selection List. A list of randomly selected policies will be sent electronically each month to the address of the individual(s) designated by the insurer. This list will include policies with expiration dates between 120 and 210 days prior to the date of selection. The Monthly Selection List will indicate the WCIRB file number, the insurer s name, the insured employer s name, the policy number, the policy issuing office (if available), and policy effective dates. 5. Monthly Selection Quota. The Monthly Selection Quota will range from 2 to 20 test audits, and will be determined by a combination of the following factors: a. Annual pure premium volume, as indicated on the latest available calendar year reporting compiled by the WCIRB; and b. The number of policies submitted to the WCIRB based on the latest complete calendar year in WCIRB records. 6. Combined payroll and claims classification audits will be conducted on each policy listed, unless the insurer is exempt from Part II, in which case only payroll audits will be conducted. 7. The insurer, within ten working days of publication of the Monthly Selection List, shall submit to the WCIRB the following audit materials: a. If physically audited, a non-returnable electronic copy of the auditor s worksheets, the premium invoice, and in the event non-standard classifications are used, a statement detailing the exposures by standard classification as they will be shown on the Unit Statistical Report; b. If the employer s voluntary payroll statement has been used and the policy has developed less than $10,000 of premium, a non-returnable electronic copy of the employer s signed payroll statement, the premium invoice, and in the event non-standard classifications are 1 WCIRB California

6 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Test Audit Procedure Payroll Audits used, a statement detailing the exposures by standard classification as they will be shown on the Unit Statistical Report; c. If the employer s voluntary payroll statement has been used and the policy will develop more than $10,000 of premium or the exposure is reported in the high-wage classification of any pair of dual construction classifications, a notification that the policy will be physically audited within 30 days and that the auditor s worksheets, the premium invoice, and in the event nonstandard classifications are used, a statement detailing the exposures by standard classification as they will be shown on the Unit Statistical Report will be submitted at that time; and d. If applicable, required material for claims audits as described in Part II below, unless the insurer is exempt from Part II. 8. Effective July 1, 2012, if the WCIRB has not received the required material by the 15 th day of the effective month of the Monthly Selection List, a fine of $5 will be charged for each calendar day thereafter until all required materials are received. (Example: For the Monthly Selection List for October, for each submission that is not received by October 15, a daily fine of $5 would be charged beginning October 16 until the submission is received.) If the submission is not received by the last day of the fifth month following the effective date of the Monthly Selection List, the policy will be eliminated from the selection and an additional fine of $500 will be charged. Materials required under Part I and Part II for the same selection will be viewed as one submission. A submission will not be considered received until all required materials are provided to the WCIRB. Waivers of fines may be granted at the WCIRB s sole discretion upon a demonstrated showing of good cause provided an application for waiver is received by the 15 th day of the effective month of the Monthly Selection List. 9. No risk will be test audited more than once in any four-year period except upon conditions established by the president of the WCIRB. 10. Insurers must notify the WCIRB of all audits or revisions of audits commenced or completed after the selection of the policy for test audit, based on the print date of the Monthly Selection List. Willful failure to notify the WCIRB that an audit or re-audit was commenced or completed after the policy was selected for test audit is improper and may result in administrative action up to and including citation to the Insurance Commissioner. Any insurer re-audit that is commenced or completed subsequent to the selection of the policy for test audit shall not be considered for purposes of determining test audit results. C. Test Audit Procedure Payroll Audits 1. Individual results of each test audit, including voluntary audits, will be sent electronically to the individual(s) designated by the insurer. Payroll results and claims classification results will be released simultaneously. 2. For each standard classification, the test audit shall apply the applicable approved pure premium rate to the difference between (1) the exposure determined by the test audit in accordance with the rules of the USRP and (2) the exposure reported by the insurer. 3. A significant difference shall be reported if: a. The sum of the absolute values of the pure premium differences for each applicable standard classification as determined in paragraph 2 above, exceeds $600 and 2% of the total insurer pure premium, or b. An incorrect experience modification is shown. c. Notwithstanding (a) above, no difference will result from an insurer s compliance with CIC if, at the time of selection the insurer notifies the WCIRB that CIC applied to the policy and specifies the classification that would have been used if CIC had not applied. 2 WCIRB California

7 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Test Audit Standards Payroll (Physical Audits) 4. For those audits that develop a significant difference, the insurer will be provided with a report explaining all differences. Payroll results and claims classification results, if applicable, will be released simultaneously. 5. A copy of the WCIRB s inspection report will also be provided in most cases. 6. For those audits that do not develop a significant pure premium difference, the insurer will be notified by letter of the name of the insured, the policy number, and the fact that the test audit was closed without significant difference from the original audit. 7. The insurer, immediately upon receiving the WCIRB s report, shall determine whether it agrees with the WCIRB s findings, making a re-audit if necessary. If there is agreement with the WCIRB s findings, the insurer shall immediately file a revised Unit Statistical Report with the WCIRB. The WCIRB, upon receiving the Unit Statistical Report, will check to ensure that it is consistent with the test audit result. All test audit differences must be closed within 60 days of notification. 8. If there is disagreement with the WCIRB s findings over pure premium differences or the experience modification, the insurer may file a protest with the WCIRB s Classification and Test Audit department at TestAuditProgram@wcirb.com. To be considered timely, the protest must be in writing, fully documenting all areas of contention, and must be filed with the WCIRB within 60 days after issuance of the test audit report. Only those differences fully documented in the initial protest will be considered by the WCIRB. The WCIRB shall respond to timely protests within 60 days. In those cases where the WCIRB does not respond within 60 days, the payroll test audit shall be eliminated unless (a) the delay is caused by a lack of cooperation by the insured or by similar circumstances beyond the WCIRB s control, (b) the insurer agrees to assist the WCIRB in acquiring the information needed to resolve the protest, and (c) the WCIRB is successful in acquiring the information. A test audit difference for which a fully documented protest is not received by the WCIRB within 60 days of issuance shall be closed as a difference. 9. In those instances where insurers are unable to resolve test audit differences with WCIRB staff, an appeal may be presented to the Classification and Rating Committee. D. Test Audit Standards Payroll (Physical Audits) 1. The results of all closed test audits will be summarized quarterly. Test audit summaries will include two reports: one for the results of all test audits closed within the most recent calendar quarter and the other for the results of all test audits closed as of the end of the most recent four consecutive calendar quarters. 2. Test audit performance will be evaluated quarterly based on the four-quarter results. 3. To achieve the Maximum Standard requires that no more than 10% of the policies test audited within the four-quarter period under review may develop significant differences as defined in Section C, paragraph 3 above, based on a minimum of 40 audits. If there are fewer than 40 audits included in the four-quarter summary, the most recent eight-quarter period will be used to achieve the 40-audit minimum. 4. Insurers achieving the Maximum Standard under Part I shall be excluded from the requirements of Part I for the next eight consecutive calendar quarters. Policies in the process of test audit, but not included in the summary at the time of exemption, will be completed and insurers will be required to file revised Unit Statistical Reports when necessary, notwithstanding exclusion from Part I. Insurers entering the Program or re-entering after exclusion will not be eligible for exclusion from Part I for eight consecutive calendar quarters. 5. To meet the Minimum Standard requires that no more than 20% of the policies test audited may develop significant differences, as defined in Section C, paragraph 3 above, based on a minimum of 40 audits. If there are fewer than 40 audits included in the four-quarter summary, the most recent eight-quarter period will be used to achieve the 40-audit minimum. If there are fewer than 3 WCIRB California

8 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Test Audit Standards Payroll (Physical Audits) 40 audits in the most recent eight-quarter period, to achieve the Minimum Standard, no more than 8 audits may develop significant differences. 6. Insurers that fail to achieve the Minimum Standard under Part I will be subject to the following administrative procedures: a. A representative of the insurer will be required to meet with the president of the WCIRB, or a designated representative, to provide a detailed explanation of the remedial measures the company is taking to restore overall audit proficiency to an acceptable level. b. Senior management of the insurer will be notified of the insurer s failure to meet the Minimum Standard and advised of the following: - If audit performance does not improve such that it meets or exceeds the Minimum Standard after two quarters or completion of enough test audits to produce a credible evaluation, whichever occurs last, the insurer will be cited to the Classification and Rating Committee for further administrative action as provided for in paragraph 7 below. - If audit performance improves to an acceptable level such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Classification and Rating Committee and subject to further administrative action as provided for in paragraph 7 below. 7. Insurers failing to achieve or sustain the Minimum Standard after meeting with WCIRB staff as provided for in paragraph 6 above will be subject to the following procedures: a. The insurer will be notified that it has been cited to the Classification and Rating Committee for failure to meet the Minimum Standard. b. An officer of the insurer will be required to meet with the Classification and Rating Committee to present the company s plan to restore audit proficiency to an acceptable level. c. At the meeting of the Classification and Rating Committee, the following actions shall be taken: i. A fine equal to 1/100 of 1% of the most recent certified calendar year written pure premium 1 at the time the insurer was notified that it had been cited to the Classification and Rating Committee pursuant to subparagraph a. above, subject to a minimum of ii. $5,000 and a maximum of $50,000, shall be imposed; and The insurer s Monthly Selection Quota shall be doubled and the insurer shall pay a fee for the cost of conducting all test audits. The increased Monthly Selection Quota shall be effective the first of the month following 60 days from the date of the Classification and Rating Committee meeting at which the insurer presented its remedial plan, unless the Committee establishes a different effective date. The increased Monthly Selection Quota and fees will continue until both of the following occur: (1) The insurer s test audit results, based on test audits selected on and after the date the insurer s Monthly Selection Quota was doubled, meet or exceed the Minimum Standard. (This period shall encompass a minimum of two quarters and shall continue until enough test audits have been completed to produce a credible evaluation); and (2) The insurer s audit performance meets or exceeds the Minimum Standard for the most recent four-quarter period. d. The Classification and Rating Committee may impose additional administrative actions as deemed necessary, including citation to the Governing Committee. e. The president of the WCIRB or his designee will report the Classification and Rating Committee s findings and actions to the appropriate insurance company officer and advise him/her of the following: 1 Complete calendar year (January 1 to December 31) direct written premium at pure premium rate level (prior to application of deductible credits), as reported to the WCIRB on the Data Call for Direct California Workers Compensation Experience (due by February of the following year), that has been certified as to its accuracy on the WCIRB Financial Call Data Certification (due by June of the following year) submitted by that insurer. 4 WCIRB California

9 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Test Audit Standards Payroll (Physical Audits) i. If the insurer s audit performance based on test audits selected on and after the date the insurer s Monthly Selection Quota was doubled does not improve such that it meets or exceeds the Minimum Standard after two quarters or completion of enough test audits to produce a credible evaluation, the insurer will be cited to the Governing Committee for further administrative action as provided for in paragraph 8 below. ii. If the insurer s audit performance improves such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Governing Committee and subject to further administrative action as provided for in paragraph 8 below. 8. An Insurer failing to achieve or sustain the Minimum Standard after review of its audit performance by the Classification and Rating Committee as provided for in paragraph 7 above will be subject to the following procedures: a. The insurer will be notified that it has been cited to the Governing Committee for failure to meet the Minimum Standard. b. An officer of the insurer will be required to meet with the Governing Committee to explain the reason that the company s plan failed to achieve the desired results and to present a new remedial plan. c. Within 60 days of the notification to the insurer that the matter has been cited to the Governing Committee: - The Monthly Selection Quota will be quadrupled and a charge for the cost of conducting all test audits will be imposed until such time audit performance meets or exceeds the Minimum Standard, or for one year (four quarters) whichever occurs last; and - A monthly fine equal to 1/100 of 1% of the most recent certified calendar year written pure premium 2 at the time the insurer was notified that it had been cited to the Classification and Rating Committee pursuant to paragraph 7, subparagraph a. above, subject to a minimum of $5,000 and a maximum of $50,000, will be imposed. The monthly fine will continue until such time as (i) enough test audits have been completed to produce a credible evaluation and (ii) audit performance meets or exceeds the Minimum Standard. d. The Governing Committee may impose any additional lawful disciplinary action it deems necessary, incidental, or convenient to encourage compliance with the Test Audit Program including citation to the Insurance Commissioner. e. The president of the WCIRB will report the Governing Committee s findings and actions to the appropriate insurance company officer and advise him/her of the following: - If audit performance does not improve such that it meets or exceeds the Minimum Standard after completion of enough test audits to produce a credible evaluation, the president will cite the insurer to the Insurance Commissioner for consideration of further administrative action, such as additional fines, penalties, and/or suspension of authority to transact workers compensation insurance, unless instructed otherwise by the Governing Committee. The citation to the Insurance Commissioner will include a report on the insurer s performance with respect to the Test Audit Program, as well as a report on the accuracy and timeliness of all statistical data submissions to the WCIRB. - If audit performance improves such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Insurance Commissioner unless the president is instructed otherwise by the Governing Committee. 9. Insurers achieving audit results between Minimum and Maximum Standards may be requested to meet periodically or correspond with the president of the WCIRB, or a designated 2 Complete calendar year (January 1 to December 31) direct written premium at pure premium rate level (prior to application of deductible credits), as reported to the WCIRB on the Data Call for Direct California Workers Compensation Experience (due by February of the following year), that has been certified as to its accuracy on the WCIRB Financial Call Data Certification (due by June of the following year) submitted by that insurer. 5 WCIRB California

10 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part I Test Audits of Payroll Reporting Special Test Audits Payroll representative, for the purpose of outlining the remedial measures the carrier proposes to implement to improve overall audit proficiency. E. Special Test Audits Payroll The test auditing of selected risks under Part I for special purposes and research may be undertaken at any time at the discretion of the WCIRB president. The results obtained from this type of test audit will be maintained separately from the results obtained through the normal Test Audit Program. 6 WCIRB California

11 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Purpose Part II Test Audits of Claims Classification A. Purpose Test audits of claims classification shall be conducted by the WCIRB for the following purposes: 1. To examine all records and the premises of insured employers relative to the classification assigned to reported claims by insurers for ensuring the accurate reporting of workers compensation insurance claim data pursuant to the California Workers Compensation Uniform Statistical Rating Plan 1995 (USRP); 2. To establish minimum standards with respect to the accuracy of claims classification and to develop a program for monitoring insurer performance toward the achievement of established standards; and 3. To improve the proficiency of claims classification through the evaluation of insurer practices and the dissemination of beneficial information relevant to claims classification procedures, training, and materials. B. Monthly Selection of Risks Claims Classification 1. All insurers participating in Part II of this Program will be test audited on a continuous monthly basis. Insurer groups will be treated for all purposes as a single insurer. 2. Insurers must designate an authorized individual for purposes of this Program as provided for under Part I, Section B, Monthly Selection of Risks Payroll Audits, paragraph Insurers that are exempt from Part I of this Program will continue to be subject to Part II, unless or until the Maximum Standard under Part II is achieved. 4. Monthly Selection List. A list of randomly selected policies will be sent electronically each month to the address of the individual(s) designated by the insurer. This list will include policies with expiration dates between 120 and 210 days prior to the date of selection. The Monthly Selection List will indicate the WCIRB file number, the insurer s name, the insured employer s name, the policy number, the policy issuing office (if available), and the policy effective dates. 5. Monthly Selection Quota. The Monthly Selection Quota will range from 2 to 20 test audits and is determined by a combination of the following factors: a. Annual pure premium volume as indicated on the latest available calendar year reporting compiled by the WCIRB; and b. The number of policies submitted to the WCIRB based on the latest complete calendar year in WCIRB records. 6. Combined payroll and claims classification audits will be conducted on each policy listed, unless the insurer (or insurer group) is exempt from Part I, in which case only claims classification audits will be conducted. 7. The insurer, within ten working days after receiving the Monthly Selection List, shall electronically submit to the WCIRB the following materials: a. A non-returnable electronic copy of claims data form (loss run). For each compensable injury of $2,001 or more, the following information must be included: name of the claimant, date of injury, standard classification assigned to the claim, claim file number, regular hourly or weekly wage (dual construction classifications only), and date the claim was reported to the insurer; and b. If applicable, required material for payroll audits as described in Part I above, unless the insurer is exempt from Part I. 8. Effective July 1, 2012, fines will be charged for each required submission of material that is not received timely as specified in Part I, Section B, Monthly Selection of Risks Payroll Audits, paragraph 8. 7 WCIRB California

12 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Test Audit Procedure Claims Classification 9. No risk will be test audited more than once in any four-year period except upon conditions established by the president of the WCIRB. 10. Any changes in claims classification made pursuant to an audit or re-audit commenced or completed subsequent to the selection of the policy for test audit, based on the print date of the Monthly Selection List, shall not be considered for purposes of determining test audit results. C. Test Audit Procedure Claims Classification 1. The test audit shall determine the correct standard classification to be assigned to each claim valued at $2,001 or more, based on the standard classification applicable to the payroll earned by the injured worker. 2. A significant difference shall be reported whenever a claim is assigned by the insurer to an incorrect classification. Each incorrectly assigned claim shall constitute a difference. No more than 10 claims per policy shall be test audited. 3. Individual results of each claims classification test audit will be sent electronically to the individual(s) designated by the insurer. Claims classification results and payroll results, if applicable, will be released simultaneously. 4. For those audits that develop a significant difference, the insurer will be provided with a report explaining the difference. 5. A copy of the WCIRB inspection report will also be provided in most cases. 6. For those audits that do not develop a significant difference, the insurer will be notified by letter of the name of the insured, the policy number, and the fact that the test audit was closed without change from the original audit. 7. Immediately upon receipt of the WCIRB s report, the insurer shall determine whether it agrees with the WCIRB s findings, making a re-audit if necessary. If there is agreement with the WCIRB s findings, the insurer immediately shall file a revised Unit Statistical Report with the WCIRB. The WCIRB, upon receiving the Unit Statistical Report, will check to ensure that it is consistent with the test audit result. All test audit differences must be closed within 60 days of notification. 8. If there is disagreement with the WCIRB s findings over the classification of claims, the insurer may file a protest with the WCIRB s Classification and Test Audit department at TestAuditProgram@wcirb.com. To be considered timely, the protest must be in writing, fully documenting all areas of contention, and must be filed with the WCIRB within 60 days after issuance of the test audit report. Only those differences fully documented in the initial protest will be considered by the WCIRB. The WCIRB shall respond to timely protests within 60 days. In those cases where the WCIRB does not respond to a timely protest within 60 days, the claims classification test audit shall be eliminated unless (a) the delay is caused by a lack of cooperation by the insured or by similar circumstances beyond the WCIRB s control, (b) the insurer agrees to assist the WCIRB in acquiring the information needed to resolve the protest, and (c) the WCIRB is successful in acquiring the information. A test audit difference for which a fully documented protest is not received by the WCIRB within 60 days of issuance shall be closed as a difference. 9. In those instances where insurers are unable to resolve test audit differences with WCIRB staff, an appeal may be presented to the Classification and Rating Committee. D. Test Audit Standards Claims Classification 1. The results of all closed claims classification test audits will be summarized quarterly. Summaries will include two reports: one for the results of all test audits closed within the most recent calendar quarter and the other for the results of all test audits closed as of the end of the most recent six consecutive calendar quarters. 2. Performance will be evaluated quarterly based on the six-quarter results. 8 WCIRB California

13 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Test Audit Standards Claims Classification 3. To achieve the Maximum Standard under Part II requires that no more than 5% of the total number of claims in the six-quarter summary are found to be misclassified, based on a minimum of 40 claims. Claims considered are those reported to the insurer during the policy period. If less than 40 claims exist in the six-quarter period, the most recent twelve-quarter period will be used to achieve the 40-claim minimum. 4. Insurers achieving the Maximum Standard under Part II shall be excluded from the requirements of Part II for the next six quarters. Policies in the process of test audit, but not included in the summary will be completed, and insurers will be required to file revised Unit Statistical Reports when necessary, notwithstanding exclusion from Part II of the Program. Insurers entering the Program or re-entering after exclusion will not be eligible for exclusion from Part II for eight calendar quarters. 5. To achieve the Minimum Standard under Part II requires that no more than 10% of the total number of claims in the six-quarter summary are found to be misclassified, based on a minimum of 40 claims. If there are fewer than 40 claims included in the six-quarter summary, the most recent twelve-quarter period will be used to achieve the 40-claim minimum. If there are fewer than 40 claims in the most recent twelve-quarter period, to achieve the Minimum Standard, no more than 4 claims may be found to be misclassified. 6. Insurers that fail to achieve the Minimum Standard under Part II will be subject to the following administrative procedures: a. A representative of the insurer will be required to meet with the president of the WCIRB, or a designated representative, to provide a detailed explanation of the remedial measures the company is taking to achieve proficiency in claim classification. b. Senior management of the insurer will be notified of the insurer s failure to meet the Minimum Standard and advised of the following: - If audit performance does not improve such that it meets or exceeds the Minimum Standard after two quarters or completion of enough test audits to produce a credible evaluation, whichever occurs last, the insurer will be cited to the Classification and Rating Committee for further administrative action as provided for in paragraph 7 below. - If audit performance improves to an acceptable level such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Classification and Rating Committee and subject to further administrative action as provided for in paragraph 7 below. 7. Insurers failing to achieve or sustain the Minimum Standard after meeting with WCIRB staff as provided for in paragraph 6 above will be subject to the following procedures: a. The insurer will be notified that it has been cited to the Classification and Rating Committee for failure to meet the Minimum Standard. b. An officer of the insurer will be required to meet with the Classification and Rating Committee to present the company s plan to restore audit proficiency to an acceptable level. c. At the meeting of the Classification and Rating Committee, the following actions shall be taken: iii. A fine equal to 1/100 of 1% of the most recent certified calendar year written pure premium 3 at the time the insurer was notified that it had been cited to the Classification and Rating Committee pursuant to subparagraph a. above, subject to a minimum of $5,000 and a maximum of $50,000, shall be imposed; and iv. The insurer s Monthly Selection Quota shall be doubled and the insurer shall pay a fee for the cost of conducting all test audits. The increased Selection Quota shall be effective the first of the month following 60 days from the date of the Classification and Rating 3 Complete calendar year (January 1 to December 31) direct written premium at pure premium rate level (prior to application of deductible credits), as reported to the WCIRB on the Data Call for Direct California Workers Compensation Experience (due by February of the following year), that has been certified as to its accuracy on the WCIRB Financial Call Data Certification (due by June of the following year) submitted by that insurer. 9 WCIRB California

14 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Test Audit Standards Claims Classification Committee meeting at which the insurer presented its remedial plan, unless the Committee establishes a different effective date. The increased Monthly Selection Quota and fees will continue until both of the following occur: (1) The insurer s Test Audit results based on test audits selected on and after the date the insurer s Monthly Selection Quota was doubled meet or exceed the Minimum Standard. (This period shall encompass a minimum of two quarters and shall continue until enough test audits have been completed to produce a credible evaluation); and (2) The insurer s audit performance meets or exceeds the Minimum Standard for the most recent six-quarter period. d. The Classification and Rating Committee may impose additional administrative actions as deemed necessary, including citation to the Governing Committee. e. The president of the WCIRB or his designee will report the Classification and Rating Committee s findings and actions to the appropriate officer of the insurer and advise him/her of the following: i. If the insurer s audit performance based on test audits selected on and after the date the insurer s Monthly Selection Quota was doubled does not improve such that it meets or exceeds the Minimum Standard after two quarters or completion of enough test audits to produce a credible evaluation, the insurer will be cited to the Governing Committee for further administrative action as provided for in paragraph 8 below. ii. If the insurer s audit performance improves such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Governing Committee and subject to further administrative action as provided for in paragraph 8 below. 8. Insurers failing to achieve or sustain the Minimum Standard after review of its audit performance by the Classification and Rating Committee as provided for in paragraph 7 above will be subject to the following procedures: a. The insurer will be notified that it has been cited to the Governing Committee for failure to meet the Minimum Standard. b. An officer of the insurer will be required to meet with the Governing Committee to explain the reason that the company s plan failed to achieve the desired results and to present a new remedial plan. c. Within 60 days of the notification to the insurer that the matter has been cited to the Governing Committee: - The Monthly Selection Quota will be quadrupled and a charge for the cost of conducting all claims classification test audits will be imposed until such time claim classification proficiency meets or exceeds the Minimum Standard or for one year (four quarters), whichever occurs last; and - A monthly fine equal to 1/100 of 1% of the most recent certified calendar year written pure premium 4 at the time the insurer was notified that it had been cited to the Classification and Rating Committee pursuant to paragraph 7, subparagraph a. above, subject to a minimum of $5,000 and a maximum of $50,000, will be imposed. The monthly fine will continue until such time as: (i) enough claims classification test audits have been completed to produce a credible evaluation, and (ii) claim classification proficiency meets or exceeds the Minimum Standard. d. The Governing Committee may impose any additional lawful disciplinary action it deems necessary, incidental, or convenient to encourage compliance with the Test Audit Program, including citation to the Insurance Commissioner. 4 Complete calendar year (January 1 to December 31) direct written premium at pure premium rate level (prior to application of deductible credits), as reported to the WCIRB on the Data Call for Direct California Workers Compensation Experience (due by February of the following year), that has been certified as to its accuracy on the WCIRB Financial Call Data Certification (due by June of the following year) submitted by that insurer. 10 WCIRB California

15 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Special Test Audits Claims Classification e. The president of the WCIRB will report the Governing Committee s findings and actions to the appropriate officer of the insurer and advise him/her of the following: - If claim classification proficiency does not improve such that it meets or exceeds the Minimum Standard after completion of enough claims classification test audits to produce a credible evaluation, the president will cite the insurer to the Insurance Commissioner for consideration of further administrative action, such as additional fines, penalties, and/or suspension of authority to transact workers compensation insurance, unless instructed otherwise by the Governing Committee. The citation to the Insurance Commissioner will include a report on the insurer s performance with respect to the Test Audit Program, as well as a report on the accuracy and timeliness of all statistical data submissions to the WCIRB. - If claim classification proficiency improves such that it meets or exceeds the Minimum Standard, the Minimum Standard must be sustained for eight quarters; otherwise, the insurer will be cited to the Insurance Commissioner unless the president is instructed otherwise by the Governing Committee. E. Special Test Audits Claims Classification The test auditing of selected risks under Part II for special purposes and research may be undertaken at any time at the discretion of the WCIRB president. The results obtained from this type of test audit will be maintained separately from the results obtained through the normal Test Audit Program. 11 WCIRB California

16 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Part II Test Audits of Claims Classification Special Test Audits Claims Classification [This page intentionally left blank.] 12 WCIRB California

17 WCIRB California Test Audit Program Effective January 1, 2012 Revised August 2015 Exhibits Special Test Audits Claims Classification Exhibits Monthly Selection Letter for Payroll and Claims Monthly Selection Letter for Payroll Only Monthly Selection Letter for Claims Only Notification Letter to the Employer Claims Classification Audit Results Sheet Test Audit Analysis Test Audit Report and Adjustments Quarterly Summary for Physical Audits Payroll Quarterly Summary for Physical Audits Payroll Detail Quarterly Summary for Voluntary Audits Payroll Quarterly Summary for Voluntary Audits Payroll Detail Quarterly Summary Claims Classification Quarterly Summary Claims Classification Detail 13 WCIRB California

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53 WCIRBCalifornia 525 Market Street, Suite 800 San Francisco, CA Voice Fax

54 1221 Broadway, Suite 900 Oakland, CA Voice Fax