CPCU 520 Assignment 5 — Risk Control and Premium Auditing

Educational Objectives
After learning the subject matter of this assignment, you should be able to:

1. Describe the goals of insurer risk control activities.

2. Describe the risk control services provided by insurers.
3. Explain how risk control cooperates with other insurer functions.
4. Explain why premium audits are conducted.
5. Describe the premium auditing process.
6. Explain why premium audits must be accurate.
7. Explain how premium auditing contributes to other insurer functions.

Outline
1. Insurer Risk Control Goals 5.3 Risk control assists insurers in meeting goals:
A. Earn a Profit-
1. Improving underwriting decisions
2. Improving premium volume
3. Encouraging risk control
4. Reducing insureds losses
5. Providing an additional revenue source- sell unbundled risk control services (RDM)
6. Reducing errors and omissions claims
B. Meet Customer Needs- partly from pressure of legislation such as:
1. OSHA, Consumer Products Safety Act, Comprehensive Environmental Response
Compensation and Liability Act, and Americans with Disabilities Act
2. Make risks more attractive to UW, help control premiums, reduce disruption, remain
socially responsible
3. Enhances relationship with producers and staff of agencies
4. Increases its own market share as well as agents
5. Attach and retain higher-quality accounts
6. Help the agency and is customers accomplish their goals
C. Comply With Legal Requirements
1. Minimum levels of risk control offered
D. Fulfill Duty to Society
1. Preventing losses is ideal
2. Reducing impact helps individuals and society as a whole
2. Risk Control Services Provided by Insurers (5.5) Three types of risk control services
A. Conducting Physical Surveys- to collect UW information such as COPE, occupations, site
diagrams, fire protection servicesw

CPCU 520 Page 1

 1. Walking tour and Interviews to evaluate loss exposures and associate hazards relating to
- perils
- Legal liability arising out of premises, operations, products
- Employee injuries
2. Moral and Morale hazards (attitudinal)
3. Providing written report with ideas on training, suggestions on changes
a. Might also include valuation
b. Helps UW gain a better understanding of the loss exposures being insured
c. Insured gains a better understanding of their loss exposures and steps that can be taken
to mitigate losses
d. Property valuation ensured insured can be more confident in adequate recovering it he
event of a total loss
B. Performing Risk Analysis and Improvement (5.12) providing training and information or
counseling services on
1. Coordinated safety program-fire, driving, machine operations
2. Technical risk control information resources- specific hazards or control mechanisms
3. WC risk management strategies
4. Fire protection systems testing and evaluation
5. Preconstruction counseling- expansions
C. Developing Safety Management Programs
1. Assist the insure in establishing risk control goals , selecting appropriate risk control
measures, organizing the resources necessary to implement the chosen risk control
measures and establishing procedures to monitor the program
D. Factors Affecting Service Levels
1. Line of Insurance- usually commercial, personal is more appraisal
2. Commercial Insured Size- larger more likely
3. Types of Loss Exposures Insured- WC impact to insureds, products
4. Potential Legal Liability- some states limit suits against insurers for lack or RC
3. Cooperation Between Risk Control and Other Insurer Functions (5.16)
A. Underwriting-
1. Technical support to UW
2. Improve understanding of the Risk
3. Reduce exposure or likelihood of loss
B. Marketing and Sales
1. More attractive risks
2. More likely to retain
3. Value to sales prop
C. Premium Auditing
1. Estimated values for WC payroll and sales
2. Correct premium for insurer and insured

CPCU 520 Page 2

 3. Meet regulator needs and requirements
4. Statistics
5. Description of operations, new operations or coverages required
D. Claims (hospital example)
1. Understand why losses occurring and work to mitigate
a. Provide codes, standards, technical advice, lab analysis
2. Eyes of claims department
a. Identify areas of research
b. Targeting loss exposures of additional attention
c. Identify characteristics associated with types of losses
d. Developing alternatives to control losses
E. Producers
4. Reasons for Premium Auditing (5.20)
A. Determine Correct Premiums
1. Exposure unit
2. Correct exposures and premiums
B. Collect Ratemaking Data
1. NCCI, state bureaus
2. Codes- must be in correct code
C. Meet Regulatory Requirements
1.
D. Deter and Detect Fraud
1. If someone is looking, less likely to fudge results (Race car example)
E. Reinforce Confidence of Insureds
1. Fair treatment
F. Obtain Additional Information
5. Premium Auditing Process (5.24)
A. Planning
1. Voluntary
2. Telephone
3. Physical- depends on regulations, size, accessibility
4. In house/vendor
B. Reviewing Operations
1. What is the nature of the business, what is primary operation (basic code) ie manufacturing,
sales, construction, etc.
C. Determining Employment Relationships
1. Each employee
2. Subcontractor- insurance or not, under direction and control
3. Each insured, entity, state and job duties
4. Corporation versus LLC, LP, etc

CPCU 520 Page 3

 D. Finding and Evaluating Books or Records
1. Account books/programs
2. Employee records
3. Overtime (premium pay)
4. Exclusions
5. Deductions
E. Auditing the Books and Records- racetrack example
1. Verification
2. Classification
F. Analyzing and Verifying Premium-Related Data
1. Complete
2. Logical
3. Titles versus tasks
4. Reconcile discrepancies- pre tax, large severance, layoffs, etc
G. Reporting the Findings
6. Importance of Accurate Premium Audits (5.31)
A. Importance for the Insured
1. Experience mods
2. Confidence in insurer
3. Errors in own reporting
B. Importance for the Insurer
1. Financial Position
a. Equitable rates
b. Timely audit improves cash flow
c. Fully earned
2. Customer Retention
a.
3. Goodwill
a. Fairness
b. Few insurance company employee contacts
4. Efficiency
a. Disputes, UW, Agent issues
5. Collections
C. Importance for Insurance Rates
1. Codes, units
7. Premium Auditing Contributions (5.34)
A. Underwriting
B. Marketing and Sales
C. Claims
D. Risk Control

CPCU 520 Page 4

 CPCU 520 Chapter 5 Risk Control and Premium Auditing session quiz

1. Risk control goals for an insurer include all but which of the following:
a. Earn a profit
b. Meeting customer needs
c. Comply with legal requirements
d. Write larger policies
2. Risk control may change a marginal policy to an acceptable one. This improves an insurers:
a. Premium volume
b. Reduce insured’s losses
c. Improve underwriting decisions
d. Improve revenue source

Discussion notes: A is the answer from the book, however, c and d are not bad answers.
One of the primary goals is to write profitable business, so writing new business is a good
way of improving this goal. C and D are not the primary goal.

3. Risk control may include all but which of the following services?
a. Conduct physical surveys
b. Perform risk analysis and improvements
c. Eliminate moral hazards
d. Develop safety management programs
4. A condition of careleness or indifference that increases the frequency or severity of losses is
a. A moral hazard
b. A physical hazard
c. A morale hazard
d. A legal hazard
5. Physical survey provides benefits to the underwriter and insured. Which of the following is
not a benefit of the physical survey?
a. UW is more confident in the exposures to be insured
b. Insured is more confident in the rates charged
c. Insured is more confident in the valuation
d. Insured has more understanding of its loss exposures and how to reduce losses
6. Risk control efforts complement the activities of other departments. Which of the following
departments benefit from risk control results?
a. Underwriting, accounting, marketing
b. Claims, human resources, customer service
c. Customer service, claims, premium auditing

CPCU 520 Page 5

 d. Underwriting, marketing, claims
7. There are a number of reasons for conducting premium audits. Which of the following is not
a key reason to conduct a premium audit:
a. To meet regulatory requirements
b. To detect moral hazards
c. To collect ratemaking data
d. To determine correct premium
8. Which of the following is not true about premium audits?
a. They are performed at the end of a policy term
b. They must be conducted on site
c. They require specialized training and knowledge
d. They provide underwriting with additional information about the risk
9. Which of the following are the stages, in correct order, of the premium auditing process?
a. Planning, reviewing operations, determining employment relationships, finding and
evaluating books and records, auditing books and records, analyzing and verifying
results, reporting on findings
b. Planning, determining employment relationships, auditing books and records, reporting
on findings, verifying findings, providing implementation plan
c. Planning, reviewing operations, touring plant and discussing roles with key employees,
developing correct class codes, verifying 941’s and payroll records, reporting findings
d. Planning , reviewing each entity, developing appropriate class codes per employee,
reviewing payroll records, validating application of codes, comparing to policy
estimates, reporting findings
10. Why is it important for a premium auditor to determine employment relationships?
a. To distinguish in which operation the employee works
b. To distinguish between employees and subcontractors
c. To develop results that withstand a test audit
d. To determine if a field audit is required
11. Why is an audit conducted after the policy term is completed?
a. The insured may have supplied the wrong codes at the beginning of the term
b. Solely to determine if the insured has increasing or decreasing sales
c. Policy’s subject to audit exposures are estimated at beginning of term
d. To provide underwriting an opportunity to validate insured’s operations
12. Premium auditing complements which of the following insured’s key departments
a. Underwriting, risk control, accounting
b. Underwriting, claims, marketing
c. Accounting, IT, customer service
d. Claims, risk control, actuarial

CPCU 520 Page 6

CPCU 520 Page 7