What is an Insurance Audit?

what is an insurance audit?

For a lot of business owners, the term ‘insurance audit’ feels menacing and terrifying.

The IRS is typically the first group who come to mind when you hear about audits. An insurance audit, on the other hand, is a totally separate procedure and, thankfully, much less daunting than an IRS audit.

Many business owners will get a notice that they have an insurance premium audit due for their workers’ compensation payments, but have no idea what that means, or what is involved.

In this article, we’ll give you a clear understanding of what an insurance audit is, why insurers conduct them, and how you can plan ahead so you’re not taken by surprise with premium increases.

 

What Is An Insurance Audit and How Does It Work?

An insurance audit process is a way for your insurer to determine how much risk they insured in the previous year. During the year that your policy was in place, the business may have experienced significant changes.

In some cases, your business may have grown, and that can mean an increase in payroll for employees. If that is the case, then there might be an increase in your insurance premiums.

The premiums that insurance companies charge for general liability (GL) and workers compensation insurance are determined by several factors.

Some insurance estimates that you self-report to the insurer – such as revenue and payroll –  are among the most critical considerations for whether there will be an insurance premium increase. 

The main rating factor for most General Liability policies is sales volume. During the interview process, the carrier inquires about your expected sales for the next 12 months, and then increases or decreases the policy depending on that information.

Payroll figures are used to price out workers’ compensation (and, in some cases, general liability). As a rule, the perceived risk of the job that workers are doing is significant, and that riskiness is used as a “class modifier” that is multiplied by the total payroll of the business.

While most businesses will do their best to estimate, in some cases their numbers may be incorrect, or out of date. In this situation, an insurance audit may be required.

For example, If you expected $500,000 in revenue and $300,000 in payroll, and those figures double the next year, the insurance carrier has to shoulder a lot more risk than they charged for that year.

As a result, the carrier performs an insurance premium audit. They request exact numbers from the previous year, and then increase the premiums based on the difference between how much you paid and what the premium should have been.

How To Best Prepare For An Insurance Audit

If you are about to go through an insurance audit, here are some tips to help you streamline the audit process: 

1) Prepare Beforehand

The insurance auditor will require access to the insured’s documents, which could include:

  • payroll reports
  • overtime expenses
  • state unemployment reviews 
  • accounting records
  • certification of insurance for any leases


Before the visit, give your team time to gather all relevant financial documents and prepare a process file so that all information is easily available for the auditor. You will need records from different departments, and these can take time to put together.

2) Select a Team Member To Work With The Auditor

Ideally, you should select a representative from your team to work directly with the insurance auditor. Someone who is acquainted with the company’s financial statements and day-to-day activities.

Workers’ compensation plans, for example, are focused on assigning staff to the appropriate classification.

It is important that your team member is familiar with the particular job responsibilities of employees and can assist the investigator with any queries. 

Also, it is highly recommended to contact your insurance agent if you have any issue regarding the investigation. They can help you out from start to the finish and make the process much smoother.

3) Make Sure to Clarify Everything

During the audit, allow the insurance auditor to ask questions. Encourage your team member to also ask the auditor for clarification about something they don’t understand.

Insurance audits can be complicated, and good communication removes any further misunderstanding and keeps everyone on the same page.

4) Meet With the Auditor for a Final Check

As the business owner, you and your team can check the auditor’s findings after the audit is completed.

Ideally, your insurance agent and the investigator should review the audit reports to ensure that they are correct. They can help compare premium prices and make sure the insurance you have (and any increases) are reasonable within the market rates.

 

What Changes After an Insurance Audit?

In certain cases, the insurance premium assigned to a commercial insurance policy isn’t final. It is actually an estimate and may be subject to change as you business grows.

Depending on your previous year’s sales and payroll, your carrier provides a premium based on estimate.

Of course, as we learned over the past year, forecasts can be off. 

This is why insurance premium audits are conducted: to assess if estimates were accurate based on actual sales and operations results. The sum of your final insurance premium is then calculated by the audit. 

In some cases, you will probably wind up with a balance due, meaning that you underpaid premiums for the year. Or in other circumstances, you may earn a refund at the end of the process.

A refund means that you overpaid your premiums for the year, and the company is reimbursing you the difference.

Be Prepared for An Insurance Audit

No business owner is excited to get an insurance audit. But when it comes to general liability insurance, liquor liability insurance, workers compensation insurance, and other commercial insurance, or business insurance plans, audits are very common.

An audit is a critical task in any institution’s business operations and reduces the risk of fraud (whether intentional or accidental). which is a frequent issue in every company. The role of auditors in the insurance industry contributes significantly to the expansion of risk coverage and the well-being of the insured business owners.

To be prepared for the audit process, you should have all relevant documents on hand, designating the right team member to manage the audit, and team up with the auditor. These steps can enable you business to avoid major reporting errors, or surprise increases in your insurance premium.

Jackson & Jackson Insurance Agents and Brokers offer commercial and business insurance in California with over 80 years of experience serving the San Dimas, Glendora, and LaVerne business communities.

We offer all lines of group health insurance that can provide you with a choice of health insurance providers based on your needs to see what works best for your business.

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