The Premium Audit Process

WHAT TO EXPECT AND HOW TO PREPARE

WHAT IS AN INSURANCE PREMIUM AUDIT?
• An insurance premium audit is a provision of your policy contract.
• The purpose of the premium audit is to develop actual exposures (usually payroll or sales) that are properly classified in accordance with manual rules and regulations. This information will be used to determine your final premium.
• Most states require premium audits to be conducted to confirm the final premium and to ensure accurate statistical data for ratemaking purposes.


WHEN IS A PREMIUM AUDIT PERFORMED?
• It is usually performed shortly after policy expiration, but can also occur early in the policy period to verify the accuracy of estimated exposures.
• It is also performed after policy cancellation, to determine your final earned premium for the shortened policy period.
• Audits will typically occur on an annual basis, but can be done every second or third year as determined by your carrier, and can go back as far as 3 years.


HOW WILL MY PREMIUM AUDIT BE CONDUCTED?
Your insurance carrier will determine the best method to conduct your premium audit based upon the size and complexity of your business operations. The most typical methods are:
• A physical visit to your business premises to review actual records and operations.
• A telephone audit, after receiving certain information requested from you in advance of the audit. The information provided will be verified over the phone.
• A voluntary report in a specified format that you will complete.

WHO WILL CONDUCT MY PREMIUM AUDIT?
Either an auditor from your insurance company or an auditor from an Independent Audit firm hired by your insurer.

HOW DO I PREPARE FOR MY AUDIT?
The objective is to make the premium audit process a positive experience. Having the appropriate records available for the audit will allow the auditor to complete the process smoothly. You will be contacted by letter or phone to schedule a date for the audit appointment and you will be requested to provide certain records. Our records checklist – below – indicates the most typical records requested for an audit. These records will help in determining the appropriate classification(s) and correct reportable exposures.

ORGANIZE YOUR PAYROLL RECORDS
Accurate records that are complete and well organized make the audit process much easier. Your advance preparation will help the auditor quickly find what he or she needs and will require less of your time for questions and/or clarifications during the actual audit. Payroll records used for an audit should be organized to clearly show payroll by:
• Policy period
• Classification code (List each type of job separately, i.e. clerical, sales, etc.)
• Separating overtime from regular pay
Note: If you maintain accurate and detailed records, you may be able to take advantage of available credits and reduce your insurance cost.

REQUEST CERTIFICATES OF INSURANCE FROM YOUR SUBCONTRACTORS
If you have subcontractors working for you, you should always ask them to provide a current Certificate of Insurance. This is critical information to provide the auditor at the time of your audit and could help to avoid possible additional premium charges.

YOUR GROSS PAYROLL
Gross payroll is the amount of payroll prior to any deductions. It includes items such as a 401(k) or cafeteria-style plan which may reduce the employee’s taxable income. Payroll for worker’s compensation or general liability purposes may not be the same as payroll reported for tax purposes. Examples of items commonly included in the payroll basis for the audit are:
• Wages and salaries
• Bonuses and Stock Bonus plans
• Vacation, Holiday, and Sick pay
• Commissions
• Profit sharing
• Payment for piece work
• Salary Reduction plans, Savings plans, Retirement or Cafeteria plans
• Substitutes for money which may include goods, board and lodging, meals, and the reasonable cash value of any non-cash item used as payment of wages.

The following are examples of the most common payroll exclusions (not inclusive.)
• Tips
• Severance pay
• Premium Overtime
• Exercised stock options

BE AVAILABLE FOR QUESTIONS
The owner of the business should be available to meet with the auditor to answer questions and review the results of the premium audit. If the owner is not available at the time of the audit, the auditor will need to meet with someone who has a thorough knowledge of the business operations. The auditor is also available to answer any questions you may have about the audit process.

YOUR AUDIT RESULTS
You will receive an audit statement from your insurance carrier shortly after the premium audit is completed. If you disagree with the audit findings, please contact your agent directly for assistance. Your agent will instruct you as to whether a formal dispute is necessary. In the case of a formal dispute, you would need to provide specific documentation as to the reason for any dispute along with associated back up documentation.

RECORDS CHECKLIST
• Payroll journals/registers
• Employer’s Quarterly Federal Tax Return Form 941 or 943 reports
• State Employer’s Quarterly Unemployment Insurance Tax reports
• Federal 1099, W2, and W3 transmittals
• General ledger/trial balance
• Financial statements
• Check register/canceled checks/bank statements
• Contractors/subcontractors records
• Job cost records/contracts/work invoices showing type of work
• Certificate of WC and/or General Liability Insurance for all subcontractors
• Benefit Plan information such as cafeteria or 401(k) plan wages
• Overtime wages summarized by classification
• List of clerical employees and duties
• Other miscellaneous business records