Why HALF Your Work Comp Policies Include Payroll Errors

Get at the root cause of premium fraud and misclassified payroll

Did you know that nearly half of all workers’ compensation policies have some level of misclassified exposure? As you would expect, some industries are worse than others. Looking at the years 2008 – 2012, construction had the largest percentage of misclassified payroll, totaling a whopping $76.8 billion. And it might surprise you to learn that just 15 class codes represent 75% of the total problem in construction.

You may be asking yourself what it means if 1 out of every 2 policies you write has inaccurate payroll numbers.

First, not every policy reaches a threshold where the level of misclassification is critical enough to examine. That begs the question of which policies you really need to pay attention to. A shot gun approach isn’t going to be very effective in answering this question. Generally speaking, we have found that smaller policies have a higher rate of misclassification.

Second, it is impractical and incredibly unprofitable to physically audit every policy. That’s especially true of smaller policies. The crux of the issue is that carriers are constantly dealing with information asymmetry. The insured knows exactly what their payroll is and what their employees are doing. The agent knows more about the insured than you do. The bad news is that carriers often have less information on hand about a particular insured at the point of new business.

The good news is that there are strategies to address the information gap that even the playing field from a data standpoint. Better yet, you can gain a competitive advantage by identifying misclassified payroll proactively. One benefit is being more exact in the types of policies to audit by going beyond traditional business rules (e.g., industry, size of policy, etc.) that trigger an audit. These blunt force tools are no longer as effective as they used to be.

Third, in light of the work comp fraud case in New York, carriers can anticipate an increasing amount of pressure from public officials to closely monitor employers’ practices. Having the right tools in place has never been more critical to stay organized and ultimately improve your bottom line.

One big part of solving the misclassification issue is having better information on class code exposure by policy. There is a straightforward set of actions you can take that are proven to help carriers get a better handle on this issue and begin to solve it. We’ve condensed these insights into an easy to follow guide, The Punch List: 4 Steps to fix payroll misclassification on your book.


Kirstin Marr is the chief brand advocate for Valen Analytics, paving the way for prospective clients to lead the innovation initiatives required to compete in today’s marketplace. She has a passion for building companies that invent leading-edge technologies to improve customers’ lives and solve the inefficiencies that exist in many traditional marketplaces. Kirstin also has a long-standing commitment to philanthropy and community leadership. She was most recently Board President for Colorado MESA, a non-profit that serves underrepresented and economically disadvantaged students to graduate from college and successfully pursue careers in Science, Technology, Engineering and Mathematics (STEM). She also co-founded a non-profit to benefit the Teen Lounge at Children’s Hospital Colorado.

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