Insurance companies perform premium audits on certain types of business policies because their unpredictable nature means that the premium rate must be estimated at first and corrected later. The insurance company conducts the audit at the end of the policy period to determine the business' actual possibility of loss, versus the loss risk that was estimated when its policy was first written. If, for example, a company's actual possibility of loss was lower than the initial estimate, the insurance company issues a refund check to the business to reimburse its premium overpayments. If its possibility of loss exceeded the estimate, the business owes the insurance company the amount of the premium that was underpaid.
Reasons for a Premium Audit
Insurance policies such as workers' compensation, general liability, liquor liability and garage liability are examples of policies that undergo premium audits. These types of policies have data that often change during the year, such as payroll, sales, total costs and admissions. The rates for these policies must be estimated at first and corrected later according to the actual data. Other reasons that an insurance company may conduct a premium audit include satisfying regulatory requirements or investigating the possibility of fraud.
Kinds of Premium Audits
A premium audit may take three forms: a self-audit, a phone audit and a physical audit. A self-audit requires the insured to fill out a form and mail the form and supporting documents back to the insurer. A phone audit is a self-audit followed by a call from the insurer to discuss the submitted data. A physical audit is an on-site inspection of the insured's place of business by the insurer, which may include a tour, a detailed review of the company's books, and a discussion of employees and their job descriptions.
A premium audit requires detailed data, such as the number of company employees, their names, job descriptions and wages. Financial data such as payroll and sales records, income statements, general ledger and cash disbursements are commonly required. Tax records and certificates of insurance for subcontractors are also usually requested.
As a business owner, you should be prepared to talk to your insurer ahead of time to see what information is needed for your specific audit. An audit is easier and faster when you have gathered all needed information ahead of time so that it is ready when called for. It also helps to assign a knowledgeable person to the auditor during a physical audit, who can guide the auditor through the workplace, answer questions and provide needed documents, according to Society Insurance.
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