Report 2017-103 Recommendation 3 Responses

Report 2017-103: Workers' Compensation Insurance: The State Needs to Strengthen Its Efforts to Reduce Fraud (Release Date: December 2017)

Recommendation #3 To: Insurance, Department of

To reduce insurers' potential underreporting of workers' compensation fraud, CDI should, by June 30, 2018, add a requirement that it consider rates of fraud claim referrals when selecting insurers to audit and that it give priority to those insurers with high volumes of premiums and very low numbers of referrals.

60-Day Agency Response

In response to the CSA Auditors' recommendations and in advance of the subsequent CSA Audit Report, CDI added a broad-based Analytical Review Examination to its FY 2017/18 SIU Examination Plan (Attachment A, Line 28). This Examination is in process and it comprises a review of referral ratios for all insurers across all lines of insurance. CDI will factor in total premiums along with reported claims and SIU investigations and give priority to those insurers with high premium and/or claims and low referral rates as part of its Examination. The basic premise underlying analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. In the case of total premium, total claims, SIU investigations, and referrals to CDI reported by the insurer on its SIU Annual Report, we would expect to see certain relationships between these statistics. High premium and low referral insurers are part of this examination. However, CDI will need to be aware of particular conditions that can cause variations in these relationships such as the insurance lines offered by the insurer, whether the insurer offers unique or specialty insurance products, whether the insurer provides coverage high or low risk industries, and the insurers' SIU structure.

In addition to conducting this evaluation, CDI added the two high-premium/low referral insurers (that it has not recently examined) to its FY 2017/18 SIU Examination Plan. Insurers P & Q per Figure 6 in the CSA Report were added to the FY 2017/18 SIU Examination Plan on December 8, 2017. An updated Examination Plan approved on January 8, 2018 (Attachment B) shows that these examinations have been tentatively scheduled.

CDI's then-current examination selection methodologies identified 6 of the 8 high-premium/low referral insurers noted by CSA. The status listing indicates CDI audited and/or was auditing these 6. The other 2 insurers have been added.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

All Recommendations in 2017-103

Agency responses received are posted verbatim.