Premium Audit

Overview

A premium audit is the process by which an insurance carrier verifies the actual exposure data used to calculate the policy premium after the policy period ends. Most commercial insurance premiums are based on estimates at inception — estimated payroll, estimated revenue, estimated subcontractor costs. The premium audit reconciles these estimates against actual figures and adjusts the premium accordingly, resulting in either an additional premium owed or a return premium to the insured.

How It Works

Premium audits are most common for workers' compensation and general liability policies, where premiums are calculated based on variable exposure measures:

• Workers' compensation: Premium is based on payroll by classification code
• General liability: Premium may be based on revenue, payroll, subcontractor costs, or square footage

The audit process typically follows these steps:

1. Audit notification: After the policy period ends, the carrier notifies the insured that an audit is required
2. Data collection: The insured provides actual payroll records, tax returns, certificates of insurance for subcontractors, and other financial data
3. Audit review: The auditor (carrier employee or independent auditor) reviews the data to determine the actual exposure
4. Classification verification: The auditor confirms that employees and operations are correctly classified
5. Premium adjustment: The final audited premium is calculated and compared to the estimated premium paid. The difference results in an additional premium or a return premium.

Audits can be conducted as physical audits (on-site review), phone audits, or mail audits depending on the policy size and carrier preference.

Compliance Relevance

Premium audits have indirect but important implications for COI compliance:

• Subcontractor certificates: During a premium audit, the insured must provide COIs for all subcontractors. Uninsured subcontractors may have their costs reclassified as the insured's payroll, dramatically increasing the premium.
• Policy cancellation risk: If a premium audit results in a large additional premium and the insured fails to pay, the carrier may cancel the policy — creating a compliance gap.
• Classification accuracy: Misclassified operations discovered during an audit may trigger mid-term policy changes that affect coverage terms.
• Vendor financial health: Repeated large audit adjustments can indicate a vendor is underreporting exposures, which raises questions about the reliability of their insurance program.

Compliance platforms should be aware of audit timelines and monitor for post-audit policy changes that could affect coverage status.