If you’ve recently purchased a commercial insurance policy for your business, you might have noticed the policy is subject to a “premium audit”. While this term might seem a bit intimdating, understanding premium audits for business insurance, and why they are necessry, will ensure you’re fully prepared when it’s time for your audit.
Rest assured, your insurance carrier is not looking for a “gotcha” moment when it comes to conducting a premium audit. Rather, this essential process ensures that you pay a fair price for your insurance coverage based on actual figures rather than projections.
In this post, we’ll walk you through what a premium audit is, why it happens, and how to prepare for one. By the end, you’ll have a better understanding of this crucial part of your insurance policy and how it helps ensure your business is appropriately covered.
What Is a Premium Audit?
A premium audit is an evaluation conducted by your business insurance provider to review your company’s actual financial and operational data for a specific policy period. The audit’s purpose is to verify that the initial premium you paid matches the level of coverage required based on your actual exposure—such as payroll, sales, or operations—during that time.
When you obtain a business insurance policy, your premium is often based on estimates. For example, if your policy is based on employee payroll, you might estimate total payroll for the year when purchasing coverage. A premium audit ensures that you are paying the correct amount—no more, no less—based on your actual data.
Why Are Premium Audits Necessary
Premium audits are essential for both small business owners and insurance providers. Here’s why they matter:
Accurate Premiums
Businesses grow and change, and a premium audit ensures your final premium reflects what actually happened during your policy period. This means you’re only paying for the coverage you truly needed.
Fairness Across Policyholders
By confirming each policyholder pays according to their actual risk exposure, audits promote fairness within an insurer’s pool of customers.
Compliance with Pollicy Terms
Premium audits ensure that all aspects of your operations were correctly understood and protected by the policy. If there have been changes to your business (like hiring new employees or expanding services), the audit will account for these differences.
When Does A Premium Audit Take Place
Typically, a premium audit takes place at the end of your business policy period. For example, if your policy runs from January to December, your insurer might conduct the audit in January of the following year. However, some insurers may conduct audits more frequently, depending on the nature of your business or their underwriting practices.
What Does A Premium Audit Evaluate?
Audits focus on measures that determine your premium, and these may vary depending on the type of insurance you have. Key factors include:
1. Payroll
The total wages you paid to employees during the policy period
2. Gross Sales/Gross Revenue
Your gross sales or revenue figures during the policy term
3. Subcontractor Costs
Payments made to any subcontractors or independent contractors that you may have hired during the policy period
4. Business Operations
Any changes in your operations or services that may alter your risk level
Depending on your insurer, you might also be asked for information specific to your industry. For instance, a construction business might submit details about completed projects or materials used.
How is a Premium Audit Conducted?
Premium audits can be conducted in a variety of ways, depending on your insurance company and the complexity of your business operations:
Mail Audit
If your insurance carrier conducts a mail audit, then you will typically receive a form to fill out and return with the requested documents. Mail audits are usually done for smaller businesses with straightforward operations.
Phone/Virtual Audit
Your insurer may conduct a premium audit over a phone or video call. In this case, you will usually be required to provide the insurance carrier documentation via email or a secure portal.
On-Site Audit
For more complex businesses, an auditor may visit your office to review records in person. This is common for industries with higher risks, such as manufacturing or construction.
Regardless of the audit method, you will need to gather and provide documentation to answer your insurer’s questions.
How to Prepare for a Premium Audit
Understanding premium audits for business insurance will go a long way towards helping you prepare for your upcoming audit. This, in turn, will help ensure a smooth and accurate audit process. Here are steps to help you get ready:
1. Organize Your records
Gather all the necessary documents, such as payroll records, tax returns, profit and loss statements, and sales reports. If you work with subcontractors, make sure you have certificates of insurance to confirm their coverage.
2. Double Check Job Classifications
Ensure employees’ duties have been classified correctly. For example, an office administrator likely has a lower risk profile than someone working with heavy machinery.
3. Track Business Changes
Document any changes in your operations, staff, or revenue throughout the policy year. This information will help explain any potential discrepancies between estimates and actual data.
4. Maintain Clear Communication
If you have questions about what documents are required or how to complete the audit, don’t hesitate to reach out to your insurance carrier for clarification. They want to ensure a smooth audit process as well.
What Happens After the Audit?
Once the audit is complete, your insurer will review the data and compare it to the estimates provided when the policy was issued. One of three outcomes is possible:
1. Premium Increase
If your actual exposure was higher than the estimates, your insurer may require an additional permium payment to cover the difference.
2. Premium Decrease
If your actual exposure was lower than expected, you may be entitled to a refund or credit toward future premiums. This will depend on your insurance carrier and their policy towards issuing a premium refund due to a lower than expected risk exposure during the policy term.
3. No Change
If your estimates were accurate, than you won’t owe additional funds nor receive a refund.
Your insurer will provide a detailed report outlining the audit’s findings and explain any adjustments to your premium. It’s important to review this report carefully and address any discrepancies immediately.
How Does A Premium Audit Impact Your Business?
While a premium audit can seem daunting, it ultimately benefits your business:
Helps Manage Cash Flow
Accurate premiums prevent overpaying or unexpected costs down the line.
Ensures Proper Coverages
A premium audit ensures your policy accurately reflects your business operations, offering peace of mind that you’re fully protected.
Improves Future Budgeting
The audit results can help you create more accurate estimates for future policies, streamlining your insurance process.
Make Premium Audits Work for Your Small Business
A premium audit isn’t something to fear; it’s a chance to ensure your business is getting the right protection—no more, no less. By understanding premium audits for business insurance, staying organized, and keeping accurate records, you can make the process as smooth as possible.
In the final analysis, premium audits are a vital compontent of business insurance, ensuring that your premiums accurately reflect the risks associated with your business. This is why understanding premium audits for business insurance is key to helping your business in the long run.
Still have questions about premium audits or your business insurance coverage? The team at BR Risk Group™ Specialty Insurance is here to help. Contact us today for guidance tailored to your needs, or learn more about our range of insurance products designed specifically for small business owners.
Disclaimer: This content is for informational purposes only and should not be considered as legal or financial advice.