Understanding Premium Audits and Why Compliance Is Important

building-complianceMany commercial insurance policies are subject to an audit since the policy premium is based upon total revenue, payroll or some other criteria that the insurer sets as a basis for pricing. Insurance companies want to collect the appropriate amount of premium for the risks, and that is why these policies are based upon quantitative measures of your business. A business that has higher numbers has a much greater risk valuation for losses, while another one with less volume in turn has a lower risk valuation.

When applying for insurance, it is very important to review your records and disclose the most accurate current information about your business. It is also vital to review the premium basis on the application and quote to make sure that the correct and most up-to-date information has been reported. You should always ask what is the basis for the premium and if that amount is subject to audit. This will help you be better prepared for an audit that will be coming at the end of the term or audit period.

At the conclusion of the audit term, the insurance company will either ask you for your actual figures, send out an auditor or both. It is extremely important to provide the actual numbers and not an estimate as insurance companies take this process very seriously.  They will take things a step further if they feel they are not getting the correct numbers.  Once you have provided the updated figures and they have been verified, you will get a statement showing either a premium balance due or a credit. A balance due is actually a positive thing as it means that your business did better than expected. However if your business did not perform so well, you will get a refund. This adjustment cycle repeats itself for each audit period, so if your business keeps growing, you may get an additional bill once each audit has been completed.

Workers Compensation Insurance

Workers comp policies are always subject to a payroll audit as these policies are strictly based on payroll numbers. This audit can be easily performed by accessing information in your payroll reports. It can be done on a monthly, quarterly or annual basis, depending on the size of your payroll. The insurance company will work with you to make sure this process goes as smoothly as possible.  Many companies have automated this process and reporting is then easier than ever.

Commercial Liability Coverage

Many commercial liability policies are subject to an audit.  Premiums are usually based on sales levels; however, some can be based on other criteria such as payroll or square footage.  In the cases of sales and payroll, these audits are usually performed at the end of the policy period. In the case of square footage, they are usually done within the first few months of the policy period, but may also be verified in future years.  This is especially true if additional or adjacent locations have been added.

Other Types of Policy Audits

Cargo policies are an example of another type that can be audited. The premium is usually based on shipping a certain volume or valuation of goods.  However, if greater or lesser amounts have been shipped, this will be audited at the end of the policy term. There are also other types of policy that may be audited. That is why it’s so important to understand the premium basis when securing a policy.

While a policy audit may be similar to a tax audit in some ways, their purposes are very different. The policy audit is done strictly to measure the business risk factors as determined by actuaries. A tax audit is done to make sure income taxes rules have been followed and tax levels are set by politics, not by actuaries. Insurance premiums also tend to increase at a regressive rate as the quantity numbers increase, meaning the burden decreases with higher numbers. Taxes, on the other hand, are progressive in most cases, meaning the burden increases with higher numbers.

If you disagree with the audit, it’s best to contact your agent to discuss your concerns. Your agent can work on your behalf to help you provide supporting documentation that will go back to the auditor for further review. That is why it’s so important that you are absolutely certain of any errors before sending these documents. If insurance companies did not have the ability to audit, rates would probably be higher since they would have to make gross assumptions about your business that may not be correct. Then businesses of all sizes would have the same or similar premiums and in turn, smaller businesses would often be subsidizing bigger businesses. That is why the premium audit process is critical.

About Brian Hendricks

Brian Hendricks is the President of Fidelity Insurance Group. Brian started Fidelity in 2003 with 0 clients. Today Fidelity Insurance Group is a Premier Independent Insurance Agency in Florida with over 3,000 families and businesses insured. Brian currently serves on advisory boards for 2 of the largest property insurance companies in Florida. Knowlege, Integrity, and Committment are his and his agency's guiding principles.
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