What Is a Premium Audit in Insurance?

A premium audit is a standard insurance process that ensures fairness and accuracy in premium charges. It involves reviewing a company’s financial records to verify information used for premium calculation. This process confirms the premium paid reflects the policyholder’s actual risk exposure over a specific period.

Understanding Premium Audits

Insurance policies, particularly for businesses, often base premiums on variable factors that are estimated at the policy’s start. These factors can include total payroll, gross sales, or vehicle mileage, which are projections of future activity. Since these are initial estimates, a premium audit becomes necessary to reconcile the estimated figures with the actual operations and exposures that occurred during the policy period.

The audit verifies actual exposures, ensuring the insurer collects the appropriate premium for the risk assumed. It also ensures the policyholder pays a premium that accurately reflects their business activities and associated risks, preventing underpayment or overpayment. This reconciliation is often stipulated within policy terms and typically occurs at the end of the policy period or upon cancellation.

Preparing for Your Audit

Preparing for a premium audit involves gathering and organizing specific financial and operational documents. Businesses should compile comprehensive payroll records, including total gross wages, detailed overtime, and employee classifications. Compensation for owners and officers may also be treated differently for premium calculation.

Key documents include tax forms (e.g., quarterly federal tax returns, W-2s, W-3s) and 1099 forms with Certificates of Insurance (COIs) for independent contractors. Additional financial records like general ledgers, cash disbursement journals, bank statements, and sales journals are often requested to verify transactions and revenue. Organizing these documents accurately streamlines the process and helps ensure correct premium calculations.

The Audit Procedure

The premium audit process begins with notification from the insurance company, often via letter or phone call. Audit methods vary based on policy size, complexity, and state requirements. Common methods include mail audits (documents submitted by policyholder), phone audits (remote review), or on-site audits (auditor visits business).

During an on-site audit, the auditor reviews financial records, asks about operations, and may conduct a physical inspection to verify employee duties or business activities. For mail or phone audits, the policyholder provides requested documents electronically or via mail, with follow-up questions handled remotely. The audit process is typically finalized within 60 to 90 days after policy expiration.

Results and Premium Adjustments

Once the audit is complete, the auditor submits their findings to the insurance company, which then processes the information to determine the final earned premium. The policyholder will receive an audit statement or report detailing the verified exposures and the resulting premium calculation. This statement compares the initial estimated premium with the actual premium determined by the audit.

There are three possible outcomes from a premium audit. If actual exposures (e.g., payroll or sales) were higher than estimated, the policyholder will owe an additional premium. Conversely, if actual exposures were lower, the policyholder will receive a return premium, which is a refund or credit towards a future policy.

If actual exposures closely matched initial estimates, there may be no change to the premium. Additional premiums are billed with a specified due date, while refunds are issued by the insurer.

Resolving Audit Disagreements

Upon receiving the audit statement, policyholders should carefully review all details for accuracy, including classifications, payroll figures, and calculations. If any discrepancies or errors are identified, the initial step is to contact the insurance company or the assigned auditor directly to discuss the findings. It is beneficial to have specific documentation ready to support any claims of error, such as corrected payroll reports, detailed job descriptions for reclassified employees, or valid Certificates of Insurance for subcontractors.

Many insurers require disputes to be submitted in writing within a specified timeframe, detailing the problem and providing supporting evidence. If initial discussions do not resolve the issue, policyholders can escalate the matter within the insurance company, often by speaking with an audit supervisor or appealing through internal channels. Further avenues for unresolved disputes may include contacting state departments of insurance or relevant rating bureaus, especially for workers’ compensation policies.