Alyssa Lane
A premium audit is a routine review of a company's financial records, including sales and payroll, to determine its actual risk exposure and adjust its premium accordingly. It is a requirement of insurance companies and is carried out at the end of each policy period or when a policy is cancelled to ensure that the premium set at the beginning of the policy period aligns with any changes in the business's operations. The auditor will notify the company and provide a list of documents to be submitted for review. The audit process typically takes between 30 to 90 days to complete, and the auditor will report the results to the insurance company, which will then make any necessary adjustments to the premium.
| Characteristics | Values |
|---|---|
| Purpose | To review a company's financial records and determine its actual risk exposure |
| Time of occurrence | At the end of each policy period or if someone cancels the policy |
| Reasons | To determine if existing coverage is adequate for a business's needs and to ensure the correct amount is paid for proper coverage |
| Notification | Insurance company notifies the policyholder, and an auditor contacts to discuss the assessment |
| Audit methods | Mail, telephone, hybrid, on-site |
| Requirements | Robust accounting and employee records, gross pay information, subcontractor details, and other financial information |
| Non-compliance | May result in a charge, possibly up to two times the estimated annual premium |
| Outcome | Adjustments to the premium, potential refund or credit if overpaid, additional payment if underpaid |
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What You'll Learn
Premium audits review a company's sales and payroll
A premium audit is a review of a company's sales and payroll records to ensure that the company paid the appropriate premium for the insurance coverage it required over the policy period. It is a routine process carried out by insurance companies to determine a company's actual risk exposure and adjust premiums accordingly.
When a company opens a new small business insurance policy, it provides estimates for business expenses, payroll, and income. The insurance company uses these estimates to set the premium for the upcoming period. However, as the company's size and circumstances change, so do its insurance needs. A premium audit looks back at the company's financial records, typically payroll or sales data, to determine the actual exposures and risk.
During a premium audit, an independent auditor will review the company's financial records, including payroll registers, sales data, and other relevant documentation. They may also request additional records depending on the company's business and operations. The auditor will typically contact the company to discuss the audit process and provide a list of required documents. The audit can be conducted through a mail audit, telephone audit, or on-site audit, where the auditor meets the company representatives and reviews the documentation on-site.
The goal of a premium audit is to ensure that the coverage paid for over the previous policy period matches the coverage the company actually needed. If the company's estimates were too low, the premium will be adjusted upwards at the end of the policy period. Conversely, if the company underperformed its estimates, they may be eligible for a refund for the extra premium paid.
Overall, premium audits help insurance companies and policyholders determine the appropriate premium rates based on current needs and actual numbers, ensuring fair and accurate charging for insurance coverage.
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Auditors contact businesses to discuss the audit process
When it is time for a premium audit, the insurance company will notify the policyholder. An auditor will then contact the policyholder to discuss the audit process and provide details on when and how the assessment will be conducted. The auditor will also provide a list of documents that need to be submitted for review. The auditor will make two attempts to reach the policyholder directly, and if they do not receive a response, they will contact the policyholder's agent for assistance.
There are several methods that can be used to conduct a premium audit, including:
- Mail audit: An audit form is mailed to the policyholder to complete and return.
- Telephone audit: A phone call is made to the policyholder, during which the auditor explains and performs the audit. This approach allows the policyholder to ask questions and receive immediate clarification.
- Hybrid audit: This approach combines mail and telephone audits. The policyholder is asked to send verification documents via mail or email, and the auditor may also conduct a phone interview.
- On-site audit: The auditor schedules a time to meet the policyholder and review all documentation on-site. This method ensures immediate response to questions and provides the auditor with complete access to the business's information.
It is important for policyholders to maintain robust accounting and employee records, as well as organise their records by employee and the type of work they perform. This can streamline the audit process and make it more efficient. Policyholders should also be prepared to provide gross pay information, including bonuses, commissions, holiday pay, and other pre-tax amounts.
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Businesses must provide documentation for review
A premium audit is a standard procedure for insurance companies to review a business's financial records and determine its actual risk exposure. It is conducted to ensure that the premium set at the beginning of the policy aligns with any changes in the business's operations. Typically, insurance companies perform an audit at the end of each policy period or when a policy is cancelled.
When it is time for a premium audit, the insurance company will notify the policyholder, and an auditor will contact them to discuss how the assessment will be conducted. The auditor will provide a list of documents that need to be submitted for review. These records typically include payroll, sales, subcontractors, owner-controlled insurance program (OCIP)/wrap-up insurance project records, and any other financial information that will help determine the correct risk classification and recommended coverage amounts.
It is important to note that the records provided should be from the most recent policy period. If the company has different operations and employees performing various types of work, the records should reflect the pay for each type of work. Additionally, if the business uses subcontractors, the insurance company will request their certificates of insurance and the total cost for all work performed by non-direct employees during the policy period. This includes independent contractors, casual labourers, and other types of subcontractors.
To prepare for a premium audit, businesses should maintain robust accounting and employee records. Organising accounting records by employee and the type of work they perform can streamline the audit process. Businesses should also be ready to provide gross pay information, including bonuses, commissions, holiday pay, sick pay, overtime pay, vacation pay, and all pretax amounts.
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Audits can be completed remotely or on-site
A premium audit is a standard procedure for insurance companies to review a business's financial records and determine its actual risk exposure. This process ensures that the premium set at the beginning of the policy aligns with any changes in the business's operations. Typically, insurance companies perform audits at the end of each policy period or when a policy is cancelled.
The audit process can be completed remotely or on-site, depending on the business's profile, needs, and location. Most audits can be completed online, but some states and insurance companies may require all or part of the audit to be done in person. An on-site audit involves the auditor setting a time to meet and review all documentation at the business premises. This method offers immediate answers to any questions and provides complete access to the business's information.
If an on-site audit is not possible or preferred, remote alternatives are available. These include mail audits, where an audit form is mailed to the business, and telephone audits, where the auditor explains and performs the audit over the phone. A hybrid audit combines mail and telephone audits, requiring the business to send verification documents by mail and allowing them to ask questions during the phone call.
Regardless of the audit method, the goal is to reevaluate the final premium based on real costs rather than estimates. This helps ensure that the business is paying the correct amount for the proper coverage and avoids potential underinsurance or overpayment issues.
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After the audit, the auditor reports the results to the insurance company
After a premium audit, the auditor reports the results to the insurance company, who will then notify the policyholder of any changes. The insurance company uses the information to adjust the premium from the previous policy period. If the audit finds that the policyholder overpaid for insurance coverage, they will receive a refund or a credit for their next policy term. On the other hand, if the audit reveals that the policyholder underpaid for coverage, they will have to pay the additional premium.
The premium audit process typically involves an independent auditor reviewing a business's financial records, including payroll, sales, and other relevant documentation. This allows the auditor to assess the business's actual risk exposure and determine if the existing coverage is adequate. The auditor may conduct the audit on-site, through mail, over the telephone, or through a combination of these methods.
The insurance company will then use the auditor's report to reevaluate the final premium based on real costs rather than estimates. This ensures that the premium set at the beginning of the policy aligns with any changes in the business's operations and that the policyholder is paying the correct amount for the proper coverage.
It is important to note that a premium audit is a requirement of insurance companies and is part of the policy conditions. If a policyholder does not complete the review, they may be subject to an Audit Noncompliance charge, which can be up to two times the estimated annual premium of the policy. Therefore, it is in the best interest of the policyholder to maintain robust accounting and employee records and to stay organized to streamline the audit process.
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Frequently asked questions
A premium audit is a review of a company's financial records, including sales and payroll, to ensure that the insurance coverage the company paid for over the previous policy period matched the coverage the company actually needed.
A premium audit is necessary because a company's size and circumstances can change quickly from what was initially estimated at the beginning of the policy period.
An insurance company typically performs a premium audit at the end of every policy period, as well as when a policy is cancelled.
The insurance company will notify the policyholder when it is time for a premium audit. The auditor will then contact the policyholder to discuss how the assessment will be conducted. The auditor will provide a list of documents that need to be submitted for the review.
After a premium audit, the auditor will report the results to the insurance company. The insurance company will then make any necessary adjustments to the premium from the previous policy period and notify the policyholder of any changes.
