I. Purpose OREGON WORKERS COMPENSATION TEST AUDIT PROGRAM

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2 I. Purpose A Test Audit Program shall be conducted by the Bureau to carry out ORS To perform this function, the Bureau shall maintain the test audit staff for examining pertinent records of a number of Oregon employers and insurers established according to the schedule in Exhibit 2 of OAR , or other appropriately credible audit levels as determined by the casualty actuary of the Insurance Division. The purposes of the Test Audit Program are as follows: A. To initiate test audits for checking the accuracy and reliability of each insurer s audits, verifying the classifications assigned and assuring that the premiums charged are based upon rates, rating plans and rating systems on file with and approved by the Insurance Division; B. To establish minimum auditing standards and to develop a program for monitoring insurer performance toward the achievement of established standards; and C. To improve audit proficiency through the evaluation of insurer auditing practices. Stats. Auth.: ORS Ch. 731 & 737 Stat. Implemented: ORS (3)(b) 1

3 II. Selection of Risks for Test Audits A All insurers or insurer groups shall be test audited on a continuous basis. The Bureau shall send each quarter a list of policies that have been selected at random for test audit to the policy issuing office or offices designated by the insurer. This list shall include policies with expiration dates not less than 90 days prior to the date of selection. The Bureau shall complete the test audits within six months after receipt. Any test audit not completed within the six-month period must not be included in the insurer s result. However, the insurer shall submit a revised unit statistical report for any audits that would have constituted an error. The Bureau shall provide the Department of Consumer and Business Services with a quarterly report of test audits that are not completed in a timely manner. 2. The number of policies to be selected for each insurer shall be determined from Exhibit 2 using the current policy premium distribution for the insurer and the error ratio from premium test audits of policies for the insurer. The policy premium distribution shall be based on estimated annual premium reported by insurers for policies subject to selection. The error ratio shall be the number of policies found to have audit errors divided by the total number of policies of the insurer that have been test audited during the latest six quarters. Only policies that exceed $5,000 in annual premium, as determined by test audit, will be included in the error ratio calculation. The error ratio shall be assigned credibility weight as described in Exhibit 2 and the complement weight shall be assigned to the statewide error ratio of all insurers for the latest six quarters. The credibility weighted error rate for the insurer shall be used to determine the policy sample rates in Exhibit The quarterly list of policies selected for test audit shall include both physical and voluntary audits. The list shall indicate, for each insurer or insurer group, the insured, the policy number, the issuing office (if available) and the policy dates. The list shall be sent to each Oregon policy issuing office of the insurer or insurer group. 4. Within 30 working days after receipt of the selection list, each issuing office shall submit to the Bureau the following audit material on those risks for which it is responsible. a) If physically audited, a nonreturnable copy of the auditor s work sheets and the premium invoice; b) Correspondence pertinent to proper completion of the audit; c) If the employer s voluntary payroll statement has been utilized and the policy has developed less than $6,000 of premium, a nonreturnable copy of employer s payroll statement and the premium invoice; 2

4 d) A non returnable copy of the claim form of first report of injury for each compensable injury of $2,000 or more. The Bureau must receive at least the name of the injured employee and the date of accident, although the following information must also be submitted if available: Job title; nature of injury; Manual classification to which claim is assigned; place of accident; claim file number; and a brief description of what the employee was doing when the accident occurred. 5. No risk shall be test audited more than once in any four-year period except upon conditions established by the Insurance Division Administrator. 6. When possible, risk selected from the insurer shall represent a cross section of the insurer s Oregon Workers Compensation writings. A diversity of premium sizes, classifications and locations shall be included in the selection. 7. Each test audit shall be a completed policy period. 8. The following must be obtained from Bureau files: a) A policy data sheet providing all necessary information shown on insurer s policy; and b) A copy of the latest Bureau inspection. 9. Not later than ten days prior to an auditor s planned visit, the auditor must mail an appointment letter to the insured, advising of the auditor s planned date of call. (See Exhibit 6.) 10. OAR and OAR as amended effective November 26, 1997, apply to actions taken by insurers under these rules on and after November 17, Stats. Auth: ORS & Stat. Implemented: ORS (3)(b) 3

5 III. Disposition of Test Audits A Individual results of each test audit, including voluntary audits, must be submitted to the office or offices designated by the insurer as soon as the Bureau audit is completed. 2. For those audits that do not develop a significant difference, defined as in excess of $300 in premium or in excess of 1% of the total earned premium, whichever is greater, the insurer must 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. 3. For those audits that do develop a significant difference, the insurer must be provided with a report explaining the difference and the effect of such difference upon the total premium. (See Exhibits 3 and 4.) 4. Results of test audits of individual insurers shall be confidential data under ORS Immediately upon receipt of the Bureau s report, the insurer shall determine whether it agrees with the Bureau s findings, making a re-audit if necessary. If there is agreement with the Bureau s findings, the insurer shall file such corrected information on the original or, if necessary, on a revised unit statistical report. When the net premium difference is not sufficient to qualify as an error but a single difference is sufficiently large to qualify as an error prior to any offsetting premium amounts, the insurer shall be advised of such differences by a non-error notice. Also, when individual claims have been assigned to an incorrect classification, a nonerror notice shall also be submitted to the insurer. Upon receipt of the non-error notice, the insurer shall report such payrolls or losses on the initial or, if necessary, a C (corrected) Unit Statistical Report. All test audit differences must be closed within sixty days of notification unless the insurer requests an extension and the request is approved by the Bureau. 6. When classifications utilized by the insurer are found to be in error, the Bureau shall take the normal appropriate action to secure compliance. 7. Findings resulting from test audits per se shall not be utilized in any action to enforce premium collections. 8. If there is disagreement with the Bureau s findings, the insurer shall communicate with the manager of the National Council on Compensation Insurance office in Portland, Oregon to resolve areas of contention. 9. When an insurer is unable to resolve test audit differences with the Bureau staff, the insurer may present an appeal to the Workers Compensation Rating System Review and Advisory Committee. 4

6 10. When an insurer is unable to resolve test audit differences with the Workers Compensation Rating System Review and Advisory Committee, the insurer may present an appeal to the Insurance Division for final determination. 5

7 IV. Summary of Test Audit Results A Test audit results shall be summarized quarterly for the individual insurer or insurer group, as well as for the industry whole. The summary must include all prior quarters up to but not exceeding a total of six quarters. The summary must reflect separately the results of physical and voluntary audits. (See Exhibits 5(a) and (b).) 2. The summary of test audit results must be reported quarterly to the insurer s home office to the attention of the appropriate executive officer. If the carrier s home office is located outside Oregon, a copy of the summary results must also be forwarded to the Oregon branch or division office that reports directly to the home office. It shall be the insurer s responsibility to keep the Bureau advised of the responsible executive to whom the summary results should be directed. 3. The Bureau shall meet with each insurer to review its results and when requested, may offer remedial suggestions when such action is indicated. 4. Summarized quarterly and six quarterly audit results shall be furnished to the Workers Compensation Rating System Review and Advisory Committee, but not by individual insurers. Individual insurer data and all insurer data shall be furnished to the Insurance Division. 5. The Bureau shall maintain sufficient records to permit accurate reporting to the insurer, Workers Compensation Rating System Review and Advisory Committee and the Insurance Division. 6. Copies of all individual insurer and summary reports shall be submitted to the Insurance Division upon completion. 6

8 V. Test Audit Standards A An insurer who fails to achieve the Minimum Standard of the Test Audit Performance for six consecutive quarters shall meet with the Insurance Division Administrator, or the Administrator s designated representative, to provide a detailed explanation of the remedial measures the insurer is taking to restore overall audit proficiency to an acceptable level. An insurer meets the Minimum Standard when the insurer satisfies the requirement that the number of premium differences in excess of $300 or 1% of the insured s premium, whichever is greater, must not exceed the critical number shown in the Table of Minimum Standards (Exhibit I). 2. An insurer who still fails to achieve the Minimum Standard following examination by the Insurance Division Administrator shall be cited to the Director of the Department of Consumer and Business Affairs for appropriate penalty including possible suspension of its certificate of authority. 3. For the purposes of this rule, only policies that exceed $5,000 in annual premium after test audit will be used to determine whether an insurer achieves the Minimum Standard. Stat. Auth.: ORS & Stats. Implemented: ORS (3)(b) 7

9 EXHIBIT I Table of Minimum Standards FAILURE TO MEET MINIMUM STANDARDS Number of Policies Audited Critical Number With Errors and Over 20% 8

10 EXHIBIT 2 CONFIDENCE LEVEL 97.5% WITH ERROR OF: 0.02 BASED ON 6 QUARTERS OF DATA PORTION OF COMPANY S POLICIES TO BE AUDITED FOR A GIVEN ERROR RATE CREDIBILITY WEIGHTED 25% ERROR RATE* 24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% PREMIUM SIZE P O R T I O N O F C O M P A N Y S P O L I C I E S T O B E A U D I T E D < % 1.3% 1.3% 1.2% 1.2% 1.1% 1.1% 1.0% 1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% 0.6% 0.5% 0.5% 0.4% 0.3% 2,501 5, % 5.2% 5.1% 4.9% 4.8% 4.6% 4.4% 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% 2.7% 2.5% 2.3% 2.0% 1.8% 1.5% 5,001 10, % 6.5% 6.3% 6.1% 5.9% 5.7% 5.5% 5.3% 5.0% 4.8% 4.5% 4.3% 4.0% 3.7% 3.5% 3.2% 2.9% 2.6% 2.3% 2.0% 10,001 25, % 4.9% 4.8% 4.6% 4.5% 4.3% 4.2% 4.0% 3.8% 3.7% 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 2.2% 2.0% 1.8% 1.5% 25,001 50, % 6.0% 5.9% 5.8% 5.6% 5.5% 5.3% 5.1% 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% 3.6% 3.4% 3.1% 2.8% 2.5% 2.2% 50, , % 6.0% 5.9% 5.7% 5.6% 5.5% 5.3% 5.2% 5.0% 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% 3.6% 3.4% 3.1% 2.8% 2.5% 100, , % 5.5% 5.4% 5.3% 5.2% 5.1% 5.0% 4.9% 4.7% 4.6% 4.4% 4.3% 4.1% 3.9% 3.7% 3.5% 3.3% 3.0% 2.8% 2.5% 250, , % 5.8% 5.7% 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% 5.0% 4.9% 4.7% 4.6% 4.4% 4.2% 4.0% 3.8% 3.6% 3.4% 3.1% 500, , % 5.8% 5.7% 5.6% 5.6% 5.5% 5.4% 5.3% 5.3% 5.2% 5.1% 5.0% 4.8% 4.7% 4.6% 4.4% 4.3% 4.1% 3.9% 3.7% 750,001 1 mil 5.4% 5.4% 5.3% 5.3% 5.2% 5.2% 5.1% 5.0% 5.0% 4.9% 4.8% 4.7% 4.6% 4.5% 4.4% 4.3% 4.3% 4.0% 3.9% 3.7% >1mil 4.3% 4.3% 4.2% 4.2% 4.1% 4.1% 4.0% 3.9% 3.9% 3.8% 3.7% 3.6% 3.5% 3.4% 3.3% 3.2% 3.0% 2.9% 2.7% 2.5% Total** 3.2% 3.1% 3.0% 2.9% 2.8% 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 1.9% 1.8% 1.7% 1.5% 1.4% 1.3% 1.1% 1.0% *Credibility-Weighted Error Rate: This number represents the appropriate portion of a company s policies with errors. In calculating this, first a credibility factor is applied to the company s actual error rate found in previous audits. The credibility factor is equivalent to N(N+100), where N is the number of policies audited for that particular company. Remaining credibility is then applied to the overall statewide error rate. ** Total: This is a rough approximation assuming that the company s distribution of policy premium size is similar to the industry s. Rounding Instructions: If multiplying the appropriate percentage in this table times the number of policies written by an insurer in a premium range produces a number with a decimal fraction of.2 or greater, round the result to the next higher whole number. 9