What Is a Premium Audit and What to Expect
Understand insurance premium audits: their necessity, how to approach the review confidently, and what the final premium adjustments mean for your business.
A premium audit is a review conducted by an insurance company to verify the accuracy of information used to calculate a policy’s premium. It ensures the initial estimated premium aligns with a business’s actual operations and risks during the policy period. Understanding this process helps businesses prepare effectively.
Purpose of Premium Audits
Premium audits ensure fairness and accuracy in insurance pricing for both the insurer and policyholder. Premiums are often initially based on estimates of a business’s operations, such as projected payroll or sales figures. The audit then reconciles these estimates with actual financial data and operational activities during the policy period, ensuring the premium paid accurately reflects true risk exposure.
Many commercial insurance policies are subject to premium audits, including Workers’ Compensation, General Liability, and certain Commercial Auto coverages. For Workers’ Compensation, premiums are based on payroll and employee job duties. General Liability premiums often derive from gross sales, square footage, or total payroll. Commercial Auto policies may use factors like total payroll or employee count as their exposure basis.
Preparing for a Premium Audit
Effective preparation for a premium audit involves organizing specific business records. Businesses should gather all payroll records, including quarterly IRS Form 941s, state unemployment reports, and detailed payroll journals. These documents verify total employee compensation, including wages, salaries, and overtime pay, which impacts Workers’ Compensation premiums. Individual employee earnings records also help confirm proper classification.
Financial records are also necessary for the audit. This includes the general ledger, profit and loss statements, and income statements, which help auditors understand overall financial activity and reconcile sales figures. Sales tax returns may also be requested to corroborate gross sales figures, a common exposure basis for general liability policies.
Tax forms like IRS Form W-2s and Form 1099s are essential for distinguishing between employees and subcontractors. For subcontractors, businesses should provide their Certificates of Insurance, demonstrating they carry their own liability coverage. This documentation helps prevent additional premium charges for uninsured subcontractors. Detailed job descriptions for employees also assist the auditor in assigning correct risk classifications, which influences Workers’ Compensation rates.
The Premium Audit Process
The premium audit process begins with a formal notification from the insurance carrier. This notification, sent via mail, email, or phone, informs the business an audit will be conducted for a specified policy period. It usually includes instructions on how to prepare and what documents are needed. The policyholder and auditor then schedule a convenient date and time.
Audits can be conducted through various methods, depending on the business’s complexity and the insurer’s procedures. A mail audit involves submitting documents electronically or by mail. Phone or virtual audits utilize online portals or video conferencing for document submission and discussion. For larger businesses, an on-site audit may occur, where an auditor visits the premises to review records directly.
During the audit, the auditor systematically reviews the financial and payroll records provided by the business. They compare these documents against initial estimates and classifications used when the policy was issued. The auditor may ask clarifying questions regarding specific entries, employee duties, or operational changes. The objective is to verify the accuracy of the exposure basis and ensure employees are correctly classified. Upon completing the review, the auditor compiles findings to determine the final premium adjustment.
Understanding Audit Results
After the premium audit, the insurance company issues an audit statement or report to the policyholder. This document details the auditor’s findings, including the verified exposure basis and any reclassifications. The report outlines how the final premium was calculated based on confirmed data. Policyholders should review this statement to understand adjustments made to their initial premium.
The audit results lead to one of three outcomes. If the audit reveals the initial estimated exposure was lower than actual figures, the policyholder receives a bill for an additional premium. This means the business owes the insurance company the difference. Conversely, if the audit shows the initial premium estimate was higher, the policyholder receives a return premium, meaning a refund or credit.
In some instances, the audit may confirm the initial premium estimate was accurate, resulting in no change. Regardless of the outcome, businesses should review the audit results for accuracy. If discrepancies are identified or an error is believed, most insurance companies provide a process for disputing findings, typically within 15 to 30 days of receiving the report.