So, I had this very interesting meeting last week, with one of the key people at a good-sized construction firm here in the Chicago area. I had been asked to come in by their insurance agent, who thought it might be helpful to bring me in for a little informative consulting, to help the insured better deal with some recurring issues on their Workers Compensation audits.
The main source of this insured's frustration, in a nutshell, is that the insurance underwriters at their very large insurance company seemed to be operating from a different playbook than the insurance auditors, who would come in every year after policy expiration and start questioning and objecting to various classification codes that had been approved by the underwriters at the time the policy began.
I was at least able to explain to this client that they weren't being picked on or singled out, that this was a common problem we see--auditors still following the book regarding classification and manual rules, even though underwriters increasingly, are speed-reading that book, if they are bothering to read it at all.
Outside of the assigned risk plans, nowadays a lot of underwriters (at least those underwriting medium to large accounts), aren't developing premiums the old fashioned way. Increasingly, they figure out how much premium they want or need for a particular account, and then work backward from historic payrolls, classifications, experience mods, and other factors to get to that number. And the underwriters often don't really care much how they get to this number, as long as they get their number. So they can be inclined to not look overly carefully at some classification codes that may have historically been used on an account.
Ah, but the auditors--their training and management still focuses on those pesky manuals that define classifications and division of payroll among classifications. So what might have seemed to have an underwriter's acceptance may run afoul of an auditor's understanding of those manual rules. The problem is that the auditor is looking at things after the policy has ended. If the auditor's view conflicts with had been the tacit acceptance of an underwriter at policy outset, it can leave the policyholder feeling like they have been the victim of an insurance "bait and switch" ploy.
A fair bit of our consulting work arises from such situations, where the premium auditors (oftentimes from a third party auditing firm instead of a direct employee of the insurer) uses a different and stricter standard regarding classifications and division of payroll among classifications than was originally employed by the underwriters. And when push comes to shove, auditors tend to be much more inflexible about these manual rules.
Sometimes a bit of technical translation on our part, helping policyholders and auditors better communicate with each other, can resolve these disputes. Other times, particularly if enough money is in dispute, it may require the involvement of insurance regulators or even a lawsuit. Needless to say, those kinds of hostile dispute resolutions can badly fray the relationship between insured and insurer--very often, these disputes shatter the relationship completely.
At the moment, we're working with this insured to pinpoint which areas may be problematic in future audits, with an eye towards making sure their documentation and record keeping is of a nature as to minimize some of these disputes. But given the continuing disconnect between how many of these policies are underwritten and how they are audited, I suspect we will continue getting calls and email from those policyholders who are on the receiving end of what we call "shock audits".