What Is an Insurance Audit and How Does It Work?

An insurance audit verifies that a policyholder’s premium accurately reflects the actual risk exposure over a specific policy period. These audits are a routine aspect of many commercial policies and do not indicate wrongdoing. They reconcile initial premium estimates with a business’s actual financial data.

What is an Insurance Audit?

An insurance audit is a systematic review of a policyholder’s financial and operational records by an insurer or a third-party firm. Its purpose is to ensure premiums for a commercial policy align with the actual risk covered during the policy term. Premiums are often based on estimated figures, like payroll or sales, at the policy’s start. The audit reconciles these initial estimates with verified figures.

This reconciliation determines if the initial premium was sufficient. If actual exposure was higher than estimated, an additional premium may be due; if lower, a refund might be issued. Insurance companies conduct these audits to assess the risk they assumed throughout the preceding year, reflecting any changes within the company. This process helps maintain fairness and accuracy in coverage and premium calculations for both the insurer and the policyholder.

Common Types of Insurance Audits

Insurance audits are most commonly associated with commercial policies where the premium basis fluctuates with business operations. Two prominent examples are Workers’ Compensation and General Liability insurance. These policies are priced based on variables that can change significantly throughout the year, necessitating a post-policy review.

For Workers’ Compensation insurance, premiums are determined by payroll figures, employee classifications, and job duties. An audit verifies these to ensure the premium accurately reflects the true exposure. General Liability insurance premiums often depend on factors like gross sales, revenue, or square footage. An audit confirms these metrics to adjust the premium, ensuring the coverage aligns with the business’s operational scope.

Preparing for an Insurance Audit

Preparing for an insurance audit involves gathering and organizing specific financial and operational documents. Having these records readily available streamlines the audit process. Policyholders should compile documents that substantiate their payroll, sales, and subcontractor expenses for the policy period. This includes detailed payroll records, such as payroll summaries, federal tax forms like Form 941, and state unemployment tax reports, along with individual employee earning records.

Businesses should prepare W-2 forms for employees and 1099 forms for independent contractors. For general liability audits, sales ledgers, general ledgers, and financial statements are often requested to verify revenue figures. Certificates of insurance for all subcontractors are important, as their lack of coverage could result in their payroll being included in your premium calculation. Organizing these documents by policy year and type helps ensure a smooth and efficient audit.

The Insurance Audit Process

The insurance audit process begins with a notification from the insurer or an independent auditing firm, sent by email, indicating that an audit is due. This notification specifies the method of audit, which can include a remote review, a phone audit, or an in-person visit, depending on the complexity and size of the business. Upon receiving this notice, the policyholder is given 30 to 45 days to prepare and submit the requested documentation.

Policyholders submit their pre-organized financial records through secure channels, such as an online portal, mail, or direct presentation to an auditor. The auditor reviews these documents, comparing the actual figures to the initial estimates provided at the policy’s inception. During this review, the auditor may have follow-up questions to clarify information or request additional supporting documents. Engaging with the auditor and providing timely responses helps ensure the accuracy and efficiency of the audit.

Understanding Audit Outcomes

Once the insurance audit is completed, the auditor compiles findings, and the policyholder receives an audit statement or report detailing the results. The audit’s outcome falls into one of three categories: an additional premium due, a refund, or no change to the original premium. An additional premium is required if actual risk exposure (based on verified data like payroll or sales) was higher than initial estimates. Conversely, a refund is issued if actual exposure was lower, indicating an overpayment.

If the audited figures closely match the estimates, there will be no change to the premium. Policyholders should carefully review the audit statement for accuracy. If there are discrepancies or disagreements with the findings, a policyholder has the right to dispute the results. This involves submitting a written appeal to the insurance company with supporting documentation and a clear explanation of the perceived error.