CIRCULAR LETTER NO. 2308
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- Fay McCarthy
- 5 years ago
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1 March 1, 2017 CIRCULAR LETTER NO To All Members and Subscribers of the WCRIBMA: TRIENNIAL AUP PROCEDURE CHANGES The Division of Insurance has requested that certain changes be made to the Triennial Agreed Upon Procedures (AUP). These changes will require listing of individual reconciliation items in the AUP findings report in order to ensure that exceptions have been grouped appropriately. A new claims related procedure is being added to check the accuracy of carrier assigned injury type codes. Additionally, language for one procedure is being modified to more clearly specify what that audit firm is being asked to do. Lastly, certain procedures require detailed explanations for variances exceeding a given threshold which is being reduced. These changes are summarized below. In both the premium and claim sections of the AUPs, when providing the reconciling items that contribute to the differences between the data contained in a carrier group s systems and the data reported to the WCRIBMA, you must now include the dollar amount of the reconciliation, arranged by policy year for each of the applicable data calls separately. Any differences that share a common cause would be aggregated by data call by policy year for purposes of determining the impact of a single reconciling item. Within the claims section of the AUP, carrier groups must now report the injury type code per the Statistical Plan. The purpose of this addition is to test controls for a sample of claims to ensure that the injury type code that is reflected in a carrier group s system is consistent with the claim files and that workplace injuries are classified correctly. For claims procedure 3, the language was changed to clarify that one claim payment from each claim is to be reviewed. For premium procedures 5, 6, and 7 and claims procedures 6 and 7, reconciling items having an absolute value greater than $100,000 will require supporting documentation. These changes will go into effect in 2018 for findings reports due July 31, To review all of the changes in more detail, please see the attached redline version of the procedures. Attachment Laura Mercurio Office Support Assistant 101 ARCH STREET 5 TH FLOOR, BOSTON, MASSACHUSETTS (617) , FAX (617) ,
2 Background on Triennial Procedures (Revised January February ) As required by the Massachusetts Workers Compensation Statistical Plan ( Statistical Plan ), at least triennially, the members of the WCRIBMA with at least a one percent market share, aggregated on an NAIC carrier group basis, will be subject to a routine review by an independent accounting firm of the carrier group s choosing. The routine review will focus on the underlying internal control environment of the carrier group governing premium and claims data. Attached is the form of the report meant to satisfy the triennial review. This document summarizes the specific purpose of each step outlined in that report. Premiums Step 1: Some carrier groups delegate the handling of premium administration to a Third Party Administrator ( TPA ). The purpose of Step 1 is to check for evidence of the carrier group s oversight of the functions delegated to the TPA and to ensure that the TPA s data collection and data reporting practices comply with the Statistical Plan. Step 2: Large deductible policies written in Massachusetts are mandated by regulation to have an applicable aggregate deductible. The purpose of Step 2 is to check for evidence that carrier groups are indeed including aggregate deductibles consistent with Massachusetts regulation 211 CMR 115 on large deductible policies that include premiums for Massachusetts. Step 3: The calculation of workers compensation premiums reported to the WCRIBMA on the aggregate financial calls relies on a number of rating factors published by the WCRIBMA. The purpose of Step 3 is to test controls for a sample of policies to ensure the application of correct values for experience modifications, merit rating adjustments, All Risk Adjustment Program (ARAP) factors, Massachusetts Construction Classification Premium Adjustment Program (MCCPAP) credits, and expense constants. The procedure will identify a sample of policies for which the values contained in the carrier group s premium system are compared to values provided by the WCRIBMA. Step 4: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 4 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for net earned premiums, as defined in the Statistical Plan.
3 Step 5: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 5 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for standard earned premiums at designated statistical reporting level, as defined in the Statistical Plan. Step 6: The Statistical Plan requires members to complete a Reconciliation Report intended to bridge any differences between the premium amounts submitted to the WCRIBMA on the aggregate financial calls and those reported on Statutory Page 14 of the Annual Statement. The purpose of Step 6 is to justify the reconciling entries listed on the Reconciliation Report. The procedure will compare amounts reported on the Reconciliation Report to supporting documentation provided by the carrier group. Claims Step 1: Some carrier groups delegate the handling of claims administration to a Third Party Administrator ( TPA ). The purpose of Step 1 is to check for evidence of the carrier group s oversight of the functions delegated to the TPA and to ensure that the TPA s data collection and data reporting practices comply with the Statistical Plan. Step 2: The Statistical Plan requires that carrier groups report paid loss amounts separately for indemnity losses and medical losses. The purpose of Step 2 is to test controls for a sample of claims to ensure that the paid amounts reflected in a carrier group s system are consistent with the associated check or draft records and that the losses are correctly classified as either indemnity or medical. Step 3: The Statistical Plan requires that carrier groups report case reserve amounts separately for indemnity losses and medical losses. The purpose of Step 3 is to test controls for a sample of claims to ensure that the case reserve amounts reflected in a carrier group s system are consistent with the claim files and that they are correctly classified as either indemnity or medical. Step 4: The Statistical Plan requires that carrier groups report the Injury Type Code. The purpose of Step 4 is to test controls for a sample of claims to ensure that the Injury Type Code reflected in a carrier group s system are consistent with the claim files and that theyworkplace injuries are correctly classified as Death, Permanent Total Disability, Temporary Total Disability, Medical Claims Only, or Permanent Partial Disability. 2
4 Step 45: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 4 5 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for paid losses and case reserves for both indemnity and medical benefits. Step 56: The Statistical Plan requires members to complete a Reconciliation Report intended to bridge any differences between the incurred loss amounts submitted to the WCRIBMA on the aggregate financial calls and those reported on Statutory Page 14 of the Annual Statement. The purpose of Step 5 6 is to justify the reconciling entries listed on the Reconciliation Report. The procedure will compare amounts reported on the Reconciliation Report to supporting documentation provided by the carrier group. DRAFT ILLUSTRATIVE FORM OF REPORT Independent Accountant's Report on Applying Agreed-Upon Procedures To the Workers Compensation Rating and Inspection Bureau (WCRIBMA), the Massachusetts Division of Insurance (DOI), and Management of CARRIER GROUP: We have performed the procedures enumerated below, which were agreed to by the managements of WCRIBMA, DOI, and CARRIER, solely to assist you in evaluating the premium and claim information submitted to the WCRIBMA through the financial aggregate data calls for the years ended December 31, 20XX and 20YY. CARRIER, Inc. s management is responsible for the premium and claim information. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. We performed the following procedures: Premiums: 3
5 1. If the carrier group delegates the handling of any policy administration to a Third Party Administrator (TPA), check for evidence of the carrier group s oversight of the functions delegated to the TPA by obtaining from the carrier group any contracts, documents or other information that: Describes the responsibilities of the carrier group; Describes the responsibilities of the TPA; Describes the functions delegated to the TPA; Describes how the carrier group evaluates the TPA s performance of the delegated functions; and Describes the remedies available to the carrier group if the TPA does not fulfill its obligations and responsibilities. 2. If the carrier group delegates the handling of any policy administration to a TPA, determine whether the TPA is complying with the same data collection and data reporting standards that are required of the carrier group under the Statistical Plan by obtaining from the carrier group any contracts, documents or other information that: Describes what data is collected by the TPA; Describes how the TPA collects the data; Describes how the collected data is reported to the carrier group; Describes when the collected data is reported to the carrier group; Describes what the TPA does to ensure that its data collection and reporting practices comply with the Statistical Plan; Describes what the carrier group does to ensure that the TPA s data collection and reporting practices comply with the Statistical Plan; and Describes what the carrier group does if the TPA s data collection and reporting practices do not comply with the Statistical Plan. 3. From the second and third preceding policy years, randomly select a total of 20 large deductible workers compensation policies with Massachusetts exposure. If the carrier group has fewer than 20 large deductible workers compensation policies with Massachusetts exposure, select all large deductible policies with Massachusetts exposure. For those policies selected, prepare a schedule that contains the following data fields: NCCI Carrier Code Policy Number (as reported to the WCRIBMA on the Unit Statistical Report) Policy Effective Date Aggregate Deductible Massachusetts standard premium Countrywide standard premium 4
6 For those selected policies without an applicable aggregate deductible, obtain an explanation from the carrier for their noncompliance with Massachusetts regulation 211 CMR 115. For those policies with less than $500,000 of countrywide standard premium (prior to application of any deductible credits), calculate the ratio of aggregate deductible to the countrywide standard premium (prior to application of any deductible credits). If the calculated ratio is greater than 3.0, obtain an explanation from the carrier for their noncompliance with Massachusetts regulation 211 CMR Identify 52 workers compensation policies from the second and third preceding policy years with Massachusetts exposure by using a stratified random sample approach. The characteristics used to define the sample strata are to include market type (voluntary or residual market), policy type, and policy size based on standard premium applied in the following way: Policy Standard Premium Ranges Market Policy Type < $10,000 >= $10,000 and < $100,000 >= $100,000 and < $500,000 > $500,000 Voluntary Guaranteed Cost s1 s2 s3 s4 Retrospectively Rated s5 s6 s7 Residual Market Large Deductible s8 s9 Guaranteed Cost s10 s11 s12 s13 Targeted Sample Size Total Sample 52 For those cells defined in the above matrix which apply to the carrier group, distribute the targeted sample size as uniformly as possible to the applicable cells in the corresponding column. If the population of policies for a given column is less than the targeted sample size, allocate any shortage as uniformly as possible to cells of the other columns so that the total sample size (S) of 52 is achieved subject to the following constraints: Individual cell sample sizes s1, s2, s3, etc must be whole numbers; Individual cell sample sizes cannot exceed the carrier group s population of policies that fit within a category; and The sum of the individual cell sample sizes must equal 52 (s1 + s2 + s3 + s13 = S = 52). 5
7 Once the polices have been identified, compare the following elements of premium per the premium system to the applicable documentation (including the Massachusetts Workers Compensation and Employer s Liability Insurance Manual and experience rating worksheets) provided by the WCRIBMA: Experience Rating Factor Merit Rating Factor ARAP Factor MCCPAP Credit Factor Expense Constant 5. Compare the net earned premium, as defined in the Statistical Plan, per the carrier group s systems for each of the second and third preceding policy years to the amount reported to the WCRIBMA on the following: Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year (second and third preceding), for each of the three bulleted calls above. For any single reconciling item with an absolute value greater than $200,000$100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any systematic differences that share a common cause occur across a number of policies should be aggregated by data call by policy year for the purpose of applying the $200,000 thresholddetermining a single reconciling item as used above. 6. Compare the earned standard premium at WCRIBMA designated statistical reporting level, as defined in the Statistical Plan, per the carrier group s systems for each of the second and third preceding policy years to the amount reported to the WCRIBMA on the following: Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year 6
8 (second and third preceding), for each of the three bulleted calls above. For any single reconciling item with an absolute value greater than $200,000$100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any systematic differences that share a common cause occur across a number of policies should be aggregated by data call by policy year for the purpose of applying the $200,000 threshold determining a single reconciling item as used above. 7. Obtain the most recent two Aggregate Financial Reconciliation Reports (Sample Reports attached) and perform the following: Claims: a. Compare the amount reported to the WCRIBMA as Annual Statement earned premium (see Earned Premium Reconciliation, Item III of the Reconciliation Report) to the amount reported on carrier group s Annual Statement, Statutory Page 14. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. b. Compare the amounts listed on the Earned Premium Reconciliation, Item II of the Reconciliation Report - listed Reconciling items - to supporting premium system reports or other carrier group supporting information. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. c. For amounts listed in Earned Premium Reconciliation, Item V of the Reconciliation Report with an absolute values that exceed $200,000$100,000, obtain supporting information and compare the amounts listed on the reconciliation to that supporting information from the carrier group. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For this procedure, any differences that share a common cause across claims should be aggregated by policy year for the purpose of determining any reconciling item, as used above. 1. If the carrier group delegates the handling of any claims administration to a Third Party Administrator (TPA), check for evidence of the carrier group s oversight of the functions delegated to the TPA by obtaining from the carrier group any contracts, documents or other information that: 7
9 Describes the responsibilities of the carrier group; Describes the responsibilities of the TPA; Describes the functions delegated to the TPA; Describes how the carrier group evaluates the TPA s performance of the delegated functions; and Describes the remedies available to the carrier group if the TPA does not fulfill its obligations and responsibilities. 2. If the carrier group delegates the handling of any claims administration to a TPA, determine whether the TPA is complying with the same data collection and data reporting standards that are required of the carrier group under the Statistical Plan by obtaining from the carrier group any contracts, documents or other information that: Describes what data is collected by the TPA; Describes how the TPA collects the data; Describes how the collected data is reported to the carrier group; Describes when the collected data is reported to the carrier group; Describes what the TPA does to ensure that its data collection and reporting practices comply with the Statistical Plan; Describes what the carrier group does to ensure that the TPA s data collection and reporting practices comply with the Statistical Plan; and Describes what the carrier group does if the TPA s data collection and reporting practices do not comply with the Statistical Plan. 3. Identify 42 randomly selected Massachusetts workers compensation lost time claims from the second and third preceding policy years by using a stratified random sample approach. The characteristics used to define the sample strata are to include claim status, either opened or closed, and the size of the claim based on the sum of the paid loss and the loss case reserve. 8
10 Paid Loss Plus Case Loss Claim Type Claim Status < $5,000 >= $5,000 and < $50,000 > $50,000 Lost Time Open s1 s2 s3 Closed s4 s5 s6 Targeted Sample Size Total Sample 42 For those cells defined in the above matrix which apply to the carrier group, distribute the targeted sample size as uniformly as possible to the applicable cells in the corresponding column. If the population of claims for a given column is less than the targeted sample size, allocate any shortage as uniformly as possible to cells of the other columns so that the total sample size (S) of 42 is achieved subject to the following constraints: Individual cell sample sizes s1, s2, s3, etc must be whole numbers; Individual cell sample sizes cannot exceed the carrier group s population of claims that fit within a category; and The sum of the individual cell sample sizes must equal 42 (s1 + s2 + s3 + s6 = S = 42). Additionally, randomly select 10 Massachusetts workers compensation medical only claims from the second and third preceding policy years. Once the claims have been identified, select one claim payment from each claim at random, determine if the payment has been categorized correctly (indemnity or medical), and compare the data in the claims system to a copy of the check or draft. 4. For the open lost time claims in 3 above, compare both the indemnity and the medical case reserve per the claims system to supporting information in the claim file. 4.5.For all claims in 3 above, compare the Injury Type Code per the claims system to supporting information in the claim file. 5.6.Compare the carrier group s policy year paid losses and case reserves for both indemnity and medical benefits per the claims system to the data reported to the WCRIBMA on the following: 9
11 Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For any single reconciling item with an absolute value greater than $200,000$100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any systematic differences that share a common cause occur across a number of claims should be aggregated by data call by policy year for the purpose of determining a single reconciling item as used aboveapplying the $200,000 threshold. 6.7.Obtain the most recent two Aggregate Financial Reconciliation Reports and perform the following: a. Compare the amount reported to the WCRIBMA as Annual Statement incurred loss (see Incurred Loss Reconciliation, Item III of the Reconciliation Report) to the amount reported on carrier group s Annual Statement, Statutory Page 14. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. b. Compare the amounts listed on the Incurred Loss Reconciliation, Item II of the Reconciliation Report - listed Reconciling items - to supporting claims system reports or other carrier group supporting information. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. c. For amounts listed in Incurred Loss Reconciliation, Item V of the Reconciliation Report with an absolute values that exceed $200,000$100,000, obtain supporting information and compare the amounts listed on the reconciliation to that supporting information from the carrier group. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For this procedure, any differences that share a common cause across claims should be aggregated by policy year for the purpose of determining any reconciling item, as used above. 10
12 We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the premium and claim information. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the WCRIBMA, the DOI, and managements of CARRIER GROUP and is not intended to be and should not be used by anyone other than these specified parties. 11
13 Background on Triennial Procedures (Revised February 2017) As required by the Massachusetts Workers Compensation Statistical Plan ( Statistical Plan ), at least triennially, the members of the WCRIBMA with at least a one percent market share, aggregated on an NAIC carrier group basis, will be subject to a routine review by an independent accounting firm of the carrier group s choosing. The routine review will focus on the underlying internal control environment of the carrier group governing premium and claims data. Attached is the form of the report meant to satisfy the triennial review. This document summarizes the specific purpose of each step outlined in that report. Premiums Step 1: Some carrier groups delegate the handling of premium administration to a Third Party Administrator ( TPA ). The purpose of Step 1 is to check for evidence of the carrier group s oversight of the functions delegated to the TPA and to ensure that the TPA s data collection and data reporting practices comply with the Statistical Plan. Step 2: Large deductible policies written in Massachusetts are mandated by regulation to have an applicable aggregate deductible. The purpose of Step 2 is to check for evidence that carrier groups are indeed including aggregate deductibles consistent with Massachusetts regulation 211 CMR 115 on large deductible policies that include premiums for Massachusetts. Step 3: The calculation of workers compensation premiums reported to the WCRIBMA on the aggregate financial calls relies on a number of rating factors published by the WCRIBMA. The purpose of Step 3 is to test controls for a sample of policies to ensure the application of correct values for experience modifications, merit rating adjustments, All Risk Adjustment Program (ARAP) factors, Massachusetts Construction Classification Premium Adjustment Program (MCCPAP) credits, and expense constants. The procedure will identify a sample of policies for which the values contained in the carrier group s premium system are compared to values provided by the WCRIBMA. Step 4: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 4 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for net earned premiums, as defined in the Statistical Plan.
14 Step 5: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 5 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for standard earned premiums at designated statistical reporting level, as defined in the Statistical Plan. Step 6: The Statistical Plan requires members to complete a Reconciliation Report intended to bridge any differences between the premium amounts submitted to the WCRIBMA on the aggregate financial calls and those reported on Statutory Page 14 of the Annual Statement. The purpose of Step 6 is to justify the reconciling entries listed on the Reconciliation Report. The procedure will compare amounts reported on the Reconciliation Report to supporting documentation provided by the carrier group. Claims Step 1: Some carrier groups delegate the handling of claims administration to a Third Party Administrator ( TPA ). The purpose of Step 1 is to check for evidence of the carrier group s oversight of the functions delegated to the TPA and to ensure that the TPA s data collection and data reporting practices comply with the Statistical Plan. Step 2: The Statistical Plan requires that carrier groups report paid loss amounts separately for indemnity losses and medical losses. The purpose of Step 2 is to test controls for a sample of claims to ensure that the paid amounts reflected in a carrier group s system are consistent with the associated check or draft records and that the losses are correctly classified as either indemnity or medical. Step 3: The Statistical Plan requires that carrier groups report case reserve amounts separately for indemnity losses and medical losses. The purpose of Step 3 is to test controls for a sample of claims to ensure that the case reserve amounts reflected in a carrier group s system are consistent with the claim files and that they are correctly classified as either indemnity or medical. Step 4: The Statistical Plan requires that carrier groups report the Injury Type Code. The purpose of Step 4 is to test controls for a sample of claims to ensure that the Injury Type Code reflected in a carrier group s system are consistent with the claim files and that workplace injuries are correctly classified as Death, Permanent Total Disability, Temporary Total Disability, Medical Claims Only, or Permanent Partial Disability. 2
15 Step 5: Many of the aggregate financial calls require the summarization of data by policy year. The purpose of Step 5 is to ensure that the data submitted to the WCRIBMA has been correctly summarized. The procedure will compare policy year summaries (for the second and third preceding policy years) per the carrier group s systems to the comparable data submitted to the WCRIBMA on the aggregate financial calls for paid losses and case reserves for both indemnity and medical benefits. Step 6: The Statistical Plan requires members to complete a Reconciliation Report intended to bridge any differences between the incurred loss amounts submitted to the WCRIBMA on the aggregate financial calls and those reported on Statutory Page 14 of the Annual Statement. The purpose of Step 6 is to justify the reconciling entries listed on the Reconciliation Report. The procedure will compare amounts reported on the Reconciliation Report to supporting documentation provided by the carrier group. DRAFT ILLUSTRATIVE FORM OF REPORT Independent Accountant's Report on Applying Agreed-Upon Procedures To the Workers Compensation Rating and Inspection Bureau (WCRIBMA), the Massachusetts Division of Insurance (DOI), and Management of CARRIER GROUP: We have performed the procedures enumerated below, which were agreed to by the managements of WCRIBMA, DOI, and CARRIER, solely to assist you in evaluating the premium and claim information submitted to the WCRIBMA through the financial aggregate data calls for the years ended December 31, 20XX and 20YY. CARRIER, Inc. s management is responsible for the premium and claim information. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. We performed the following procedures: Premiums: 3
16 1. If the carrier group delegates the handling of any policy administration to a Third Party Administrator (TPA), check for evidence of the carrier group s oversight of the functions delegated to the TPA by obtaining from the carrier group any contracts, documents or other information that: Describes the responsibilities of the carrier group; Describes the responsibilities of the TPA; Describes the functions delegated to the TPA; Describes how the carrier group evaluates the TPA s performance of the delegated functions; and Describes the remedies available to the carrier group if the TPA does not fulfill its obligations and responsibilities. 2. If the carrier group delegates the handling of any policy administration to a TPA, determine whether the TPA is complying with the same data collection and data reporting standards that are required of the carrier group under the Statistical Plan by obtaining from the carrier group any contracts, documents or other information that: Describes what data is collected by the TPA; Describes how the TPA collects the data; Describes how the collected data is reported to the carrier group; Describes when the collected data is reported to the carrier group; Describes what the TPA does to ensure that its data collection and reporting practices comply with the Statistical Plan; Describes what the carrier group does to ensure that the TPA s data collection and reporting practices comply with the Statistical Plan; and Describes what the carrier group does if the TPA s data collection and reporting practices do not comply with the Statistical Plan. 3. From the second and third preceding policy years, randomly select a total of 20 large deductible workers compensation policies with Massachusetts exposure. If the carrier group has fewer than 20 large deductible workers compensation policies with Massachusetts exposure, select all large deductible policies with Massachusetts exposure. For those policies selected, prepare a schedule that contains the following data fields: NCCI Carrier Code Policy Number (as reported to the WCRIBMA on the Unit Statistical Report) Policy Effective Date Aggregate Deductible Massachusetts standard premium Countrywide standard premium 4
17 For those selected policies without an applicable aggregate deductible, obtain an explanation from the carrier for their noncompliance with Massachusetts regulation 211 CMR 115. For those policies with less than $500,000 of countrywide standard premium (prior to application of any deductible credits), calculate the ratio of aggregate deductible to the countrywide standard premium (prior to application of any deductible credits). If the calculated ratio is greater than 3.0, obtain an explanation from the carrier for their noncompliance with Massachusetts regulation 211 CMR Identify 52 workers compensation policies from the second and third preceding policy years with Massachusetts exposure by using a stratified random sample approach. The characteristics used to define the sample strata are to include market type (voluntary or residual market), policy type, and policy size based on standard premium applied in the following way: Policy Standard Premium Ranges Market Policy Type < $10,000 >= $10,000 and < $100,000 >= $100,000 and < $500,000 > $500,000 Voluntary Guaranteed Cost s1 s2 s3 s4 Retrospectively Rated s5 s6 s7 Residual Market Large Deductible s8 s9 Guaranteed Cost s10 s11 s12 s13 Targeted Sample Size Total Sample 52 For those cells defined in the above matrix which apply to the carrier group, distribute the targeted sample size as uniformly as possible to the applicable cells in the corresponding column. If the population of policies for a given column is less than the targeted sample size, allocate any shortage as uniformly as possible to cells of the other columns so that the total sample size (S) of 52 is achieved subject to the following constraints: Individual cell sample sizes s1, s2, s3, etc must be whole numbers; Individual cell sample sizes cannot exceed the carrier group s population of policies that fit within a category; and The sum of the individual cell sample sizes must equal 52 (s1 + s2 + s3 + s13 = S = 52). 5
18 Once the polices have been identified, compare the following elements of premium per the premium system to the applicable documentation (including the Massachusetts Workers Compensation and Employer s Liability Insurance Manual and experience rating worksheets) provided by the WCRIBMA: Experience Rating Factor Merit Rating Factor ARAP Factor MCCPAP Credit Factor Expense Constant 5. Compare the net earned premium, as defined in the Statistical Plan, per the carrier group s systems for each of the second and third preceding policy years to the amount reported to the WCRIBMA on the following: Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year (second and third preceding), for each of the three bulleted calls above. For any single reconciling item with an absolute value greater than $100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any differences that share a common cause across policies should be aggregated by data call by policy year for the purpose of determining a single reconciling item as used above. 6. Compare the earned standard premium at WCRIBMA designated statistical reporting level, as defined in the Statistical Plan, per the carrier group s systems for each of the second and third preceding policy years to the amount reported to the WCRIBMA on the following: Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year (second and third preceding), for each of the three bulleted calls above. For any single 6
19 reconciling item with an absolute value greater than $100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any differences that share a common cause across policies should be aggregated by data call by policy year for the purpose of determining a single reconciling item as used above. 7. Obtain the most recent two Aggregate Financial Reconciliation Reports (Sample Reports attached) and perform the following: Claims: a. Compare the amount reported to the WCRIBMA as Annual Statement earned premium (see Earned Premium Reconciliation, Item III of the Reconciliation Report) to the amount reported on carrier group s Annual Statement, Statutory Page 14. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. b. Compare the amounts listed on the Earned Premium Reconciliation, Item II of the Reconciliation Report - listed Reconciling items - to supporting premium system reports or other carrier group supporting information. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. c. For amounts listed in Earned Premium Reconciliation, Item V of the Reconciliation Report with an absolute values that exceed $100,000, obtain supporting information and compare the amounts listed on the reconciliation to that supporting information from the carrier group. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For this procedure, any differences that share a common cause across claims should be aggregated by policy year for the purpose of determining any reconciling item, as used above. 1. If the carrier group delegates the handling of any claims administration to a Third Party Administrator (TPA), check for evidence of the carrier group s oversight of the functions delegated to the TPA by obtaining from the carrier group any contracts, documents or other information that: Describes the responsibilities of the carrier group; Describes the responsibilities of the TPA; Describes the functions delegated to the TPA; 7
20 Describes how the carrier group evaluates the TPA s performance of the delegated functions; and Describes the remedies available to the carrier group if the TPA does not fulfill its obligations and responsibilities. 2. If the carrier group delegates the handling of any claims administration to a TPA, determine whether the TPA is complying with the same data collection and data reporting standards that are required of the carrier group under the Statistical Plan by obtaining from the carrier group any contracts, documents or other information that: Describes what data is collected by the TPA; Describes how the TPA collects the data; Describes how the collected data is reported to the carrier group; Describes when the collected data is reported to the carrier group; Describes what the TPA does to ensure that its data collection and reporting practices comply with the Statistical Plan; Describes what the carrier group does to ensure that the TPA s data collection and reporting practices comply with the Statistical Plan; and Describes what the carrier group does if the TPA s data collection and reporting practices do not comply with the Statistical Plan. 3. Identify 42 randomly selected Massachusetts workers compensation lost time claims from the second and third preceding policy years by using a stratified random sample approach. The characteristics used to define the sample strata are to include claim status, either opened or closed, and the size of the claim based on the sum of the paid loss and the loss case reserve. 8
21 Paid Loss Plus Case Loss Claim Type Claim Status < $5,000 >= $5,000 and < $50,000 > $50,000 Lost Time Open s1 s2 s3 Closed s4 s5 s6 Targeted Sample Size Total Sample 42 For those cells defined in the above matrix which apply to the carrier group, distribute the targeted sample size as uniformly as possible to the applicable cells in the corresponding column. If the population of claims for a given column is less than the targeted sample size, allocate any shortage as uniformly as possible to cells of the other columns so that the total sample size (S) of 42 is achieved subject to the following constraints: Individual cell sample sizes s1, s2, s3, etc must be whole numbers; Individual cell sample sizes cannot exceed the carrier group s population of claims that fit within a category; and The sum of the individual cell sample sizes must equal 42 (s1 + s2 + s3 + s6 = S = 42). Additionally, randomly select 10 Massachusetts workers compensation medical only claims from the second and third preceding policy years. Once the claims have been identified, select one claim payment from each claim at random, determine if the payment has been categorized correctly (indemnity or medical), and compare the data in the claims system to a copy of the check or draft. 4. For the open lost time claims in 3 above, compare both the indemnity and the medical case reserve per the claims system to supporting information in the claim file. 5. For all claims in 3 above, compare the Injury Type Code per the claims system to supporting information in the claim file. 6. Compare the carrier group s policy year paid losses and case reserves for both indemnity and medical benefits per the claims system to the data reported to the WCRIBMA on the following: 9
22 Aggregate Financial Policy Year Call Aggregate Financial Large Deductible Policy Year Call Aggregate Financial F Classification Policy Year Call Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For any single reconciling item with an absolute value greater than $100,000, obtain supporting documentation from the carrier group and compare that documentation to the policy year variances. For this procedure, any differences that share a common cause across claims should be aggregated by data call by policy year for the purpose of determining a single reconciling item as used above. 7. Obtain the most recent two Aggregate Financial Reconciliation Reports and perform the following: a. Compare the amount reported to the WCRIBMA as Annual Statement incurred loss (see Incurred Loss Reconciliation, Item III of the Reconciliation Report) to the amount reported on carrier group s Annual Statement, Statutory Page 14. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. b. Compare the amounts listed on the Incurred Loss Reconciliation, Item II of the Reconciliation Report - listed Reconciling items - to supporting claims system reports or other carrier group supporting information. Obtain from the carrier group a schedule of the reconciling items that contribute to the differences between the data contained in the carrier group s systems and the data reported to the WCRIBMA. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. c. For amounts listed in Incurred Loss Reconciliation, Item V of the Reconciliation Report with an absolute values that exceed $100,000, obtain supporting information and compare the amounts listed on the reconciliation to that supporting information from the carrier group. List and include in the Agreed Upon Procedures report the reconciling items and the dollar amount of the reconciliation, arranged by policy year. For this procedure, any differences that share a common cause across claims should be aggregated by policy year for the purpose of determining any reconciling item, as used above. We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the premium and claim information. 10
23 Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the WCRIBMA, the DOI, and managements of CARRIER GROUP and is not intended to be and should not be used by anyone other than these specified parties. 11
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