What Is an Insurance Audit and Why Do I Need One?

An insurance audit is a routine process conducted by insurance companies to review a policyholder’s records. Its primary purpose is to ensure that the premium charged accurately reflects the actual risk exposure during the policy period. This practice helps insurers maintain fairness across their client base by verifying the information initially used to calculate premiums.

Understanding Insurance Audits

Insurance companies conduct audits to verify the accuracy of the estimated information provided when a policy was first issued or renewed. Businesses often provide projections for factors like payroll, sales revenue, or the number of employees. These projections serve as the basis for calculating the initial premium.

The audit allows the insurer to compare these estimates against the business’s actual financial records and operational data for the policy term. If the actual figures differ significantly from the estimates, the premium can be adjusted accordingly. This process ensures that businesses pay a premium proportionate to their actual risk, preventing both underpayment and overpayment of insurance costs. It helps maintain equity among all policyholders by ensuring that premiums are based on precise risk assessments.

Common Types of Insurance Audits

Workers’ Compensation insurance policies are subject to audits because their premiums are reliant on employee payroll and job classifications. Insurers examine total payroll figures and how wages are distributed among different employee roles, as each role carries a specific risk classification code. These codes, established by organizations like the National Council on Compensation Insurance (NCCI) in most states, determine the rate applied to payroll for premium calculation.

General Liability insurance policies also undergo audits, with premiums based on factors like gross sales, total revenue, or payroll, depending on the business type. For example, a retail business’s general liability premium might be tied to its sales figures, while a service company’s might relate to its payroll. These audits verify the reported operational metrics against financial records to ensure accurate premium calculation.

Commercial auto policies may be audited to confirm the number of vehicles, their usage, and the accuracy of listed drivers. Commercial property policies might also be audited to verify property values, occupancy details, or updates to the insured premises. Each audit type focuses on the specific data points that directly influence the policy’s risk assessment and premium calculation.

Information Needed for an Insurance Audit

Preparing for an insurance audit involves gathering various financial and operational documents that substantiate the activities of your business. Payroll records are requested for workers’ compensation audits, including total gross payroll and a detailed breakdown by employee classification. This also includes officer or owner payroll, which may be excluded or capped based on state regulations.

Tax forms are also requested, such as IRS Form 941, which reports wages and taxes withheld. State unemployment tax reports, annual IRS Form W-2 for employees, and IRS Form 1099-NEC for independent contractors are also reviewed. These forms help verify total compensation paid and the classification of workers.

For general liability audits, sales records or revenue statements from your income statement are required to verify reported gross receipts. Access to your general ledger or other financial statements, such as the profit and loss statement, provides a holistic view of your business’s financial activity. If your business utilizes subcontractors, certificates of insurance from each subcontractor are important to demonstrate they carry their own coverage, preventing their payroll from being included in your workers’ compensation premium calculation.

The Insurance Audit Procedure

Once an insurance audit is initiated, you will receive a notification from your insurer by mail or email. This notification outlines the specific policy period under review and provides instructions on how to proceed. It also lists the types of documents and information the auditor will need to complete their review.

Audits can be conducted through various methods, including mail, phone, an online portal, or an in-person visit by an auditor. The notification will specify the method chosen for your audit and provide details on how to submit the requested documents. This might involve uploading digital files to a secure online platform, mailing physical copies, or scheduling a meeting for an on-site review.

After you submit the required information, the auditor will review your records. This review period can vary, ranging from a few days to several weeks, depending on the complexity of your business and the completeness of the submitted documents. The auditor may have follow-up questions if they need clarification on any submitted data. Upon completion, you will receive an audit report detailing the findings and any premium adjustments.

Interpreting Audit Outcomes

After the insurance company completes its review, you will receive an audit statement detailing the findings. There are several possible outcomes for your policy’s premium. A common result is a premium adjustment, which means your final premium is either increased or decreased based on the actual exposure found during the audit.

If the initial estimated premium you paid was higher than the actual premium determined by the audit, you will receive a refund. Conversely, if your initial estimated premium was lower than the audit’s findings, you will owe an additional payment to cover the shortfall. In some cases, if the initial estimate closely matched your actual exposure, there may be no change to your premium. It is important to carefully review the audit statement for accuracy and compare the figures against your own records.