Premium audit

An insurance premium audit looks back at your company’s financial records to determine your actual exposures to risk. Typically, your insurance company will perform an audit at the end of every policy period, as well as when you cancel your policy.

The goal of a premium audit is to make sure the coverage you paid for over your previous policy period matched the coverage your company actually needed.

When you start a new small business insurance policy, you typically provide estimates for your business expenses, payroll, and income. Your insurance carrier uses these estimates to set your premium for the upcoming policy period. However, your company’s size and circumstances can change quickly from what you estimated at the beginning of the period.

A premium audit is an opportunity for both you and your insurance company to reevaluate your final premium based on real costs rather than estimates.

A workers’ compensation policy is the most common insurance policy to use premium audits, but you may receive an audit for your general liability insurance as well.

Most states require businesses with a certain number of employees to carry workers’ compensation insurance. If your business grows beyond your original estimates, or if your employees are misclassified, you could be underinsured and risk regulatory noncompliance.

A workers’ comp premium audit helps you avoid that problem completely by modifying your premium size at the end of the policy, based on how much coverage you actually needed.

At the beginning of a policy period, you provide estimates for your company’s size and growth. Your insurer uses these estimates to set your premium for the insurance policy.

However, your company may grow either faster or slower than you expected. In other cases, you may shift what your business does and your employees' classifications. All of these changes likely weren’t accounted for in your initial premium. This could lead to:

• Underpaying for coverage when your estimates are lower than your actual numbers
• Paying for too much coverage if your company growth did not meet your estimates

Instead of trying to adjust your premium throughout your policy period to make sure you’re on track, your insurance company will correct any discrepancies at the end of that period.

Your insurance company will contact you when it’s time for your insurance premium audit. Your auditor will then typically reach out directly with details about when and how they’ll conduct your insurance review.

Most audits can be completed online, though some states and insurance companies may require some or all of the audit to be performed in person.

Your premium auditor will give you a list of all the documents they’ll need to review your business operations and insurance policy for the past term. You’ll submit the required paperwork, and answer any questions and requests for additional information that they may have.

In most cases, they’ll complete their audit process and report to your insurance company within 30 days.

The best way to prepare for your policy premium audit is to keep your company records organized and accurate throughout the year. Your auditor will likely need to see the following documents:

• Payroll records
• Overtime pay records
• Job duties and employee classification codes
• Description of your company’s services
• Cash expenses
• General company ledger
• W-2 and 1099 forms for all employees and contractors
• Company federal tax return forms
• Certificates of insurance for all subcontractors

After a premium audit, the auditor will report the audit results to your insurance company.

The insurance company will use this information to make any necessary adjustments to your premium from the previous policy period. They’ll then notify you of any changes.

If the audit found that you overpaid for insurance coverage, you’ll either receive a refund or a credit for your next policy term.

But if you underpaid for coverage, you’ll have to make up the difference. Your insurance provider will let you know how soon you need to pay your additional premium.

The original cost for your insurance premium will take into account multiple factors about your small business, including average costs for your industry, your expected sales, and the number of employees. Because your initial premium is based on estimates, there's a chance you could either underpay or overpay for insurance over the policy period. A premium audit will set your insurance premium to its appropriate rate based on your company’s actual payroll, revenue, and expenses over the policy term. 

If your estimates were too low, your premium will go up at the end of your policy period. But if your company underperformed the estimates, you’ll likely receive a refund for the extra premium that you’ve already paid.