What Is an Insurance Audit and How Does It Work?

An insurance audit is a routine financial review conducted by insurance companies to assess a business’s actual operations and exposures during a specific policy period. It verifies that estimated premiums paid throughout the year accurately reflect the true risk undertaken by the insurer. This process is a standard practice for many commercial insurance policies, ensuring fairness in premium calculation.

Understanding the Purpose of Insurance Audits

Insurance audits ensure premiums align with a business’s actual risk exposure. Premiums are typically based on estimated figures, such as projected payroll or sales, at the start of a policy term. Over the year, a business’s operations can change, leading to discrepancies between initial estimates and actual activity.

The audit reconciles these estimated figures with actual data, allowing the insurer to determine the precise premium owed. This helps prevent both overpaying and underpaying for coverage. For certain insurance types, like workers’ compensation, audits also ensure compliance with state-specific regulations governing premium calculations and risk classifications.

Common Types of Insurance Audits

Many commercial insurance policies are subject to audits, with Workers’ Compensation and General Liability being among the most frequently audited. These policies directly tie premiums to a business’s operational metrics, necessitating periodic review.

Workers’ Compensation audits focus on payroll records and employee classifications. Auditors examine total payroll, including wages, commissions, bonuses, and overtime pay. They also verify that employees are correctly classified according to their job duties and associated risk levels, as misclassification can significantly impact the premium.

General Liability audits center on a business’s gross receipts, sales figures, and sometimes square footage or subcontractor costs. The auditor reviews these metrics to assess the business’s exposure to third-party risks and property damage claims. For businesses utilizing subcontractors, the audit often requires proof of the subcontractor’s own insurance coverage to avoid their payroll being included in the policyholder’s premium calculation.

The Insurance Audit Process

The insurance audit process typically begins with a notification from the insurer, often sent near the end of the policy period. This notification informs the policyholder of the upcoming audit and outlines the documents and information required.

During data collection, auditors request various financial and operational records. Common documents include payroll reports, such as quarterly federal tax forms and state unemployment reports, along with W-2 forms for employees and 1099 forms for independent contractors. Businesses may also need to provide general ledgers, profit and loss statements, and certificates of insurance for any subcontractors hired.

Audits can be conducted through various methods, including mail, phone, or an in-person visit, depending on the complexity of the business and policy. The auditor reviews submitted documentation to verify the accuracy of reported figures and classifications. After review, the auditor finalizes a report detailing findings and any premium adjustments.

Interpreting Audit Results

Upon audit completion, the policyholder receives an audit statement detailing the findings. This statement outlines the audited figures and the final premium calculation for the policy period. An insurance audit can result in either an additional premium due or a refund or credit.

If actual exposure, such as payroll or sales, was higher than initially estimated, an additional premium will be due to cover the increased risk the insurer carried. Conversely, if actual exposure was lower than estimated, the policyholder may receive a refund or a credit towards future premiums. Policyholders have a right to review audit results and, if they believe there is an error, dispute the findings with the insurance company.