By Loring King, Senior Vice President of Underwriting, ARM, CRM, CIC
Provisions within the insurance contract permit the insurance company to audit/examine your records to ensure that proper classification were applied and to adjust premiums to reflect your actual business’ financial results.
The typical coverages subject to audit include General Liability, Workers Compensation and certain reporting forms.
These coverages have their premiums based on estimated exposures. The exposures are then multiplied by the rate per unit of exposures (i.e. sales/receipts, payroll, other units of exposure) to develop the associated premium.
Audits generally occur within a couple of months of policy expiration or cancellation.
The figures for the audit can be obtain through various methods:
- Physical audit – visiting your place of business/your accountant to review actual records. This method is commonplace for Workers Compensation
- Telephone audit – basic information is provided to the carrier prior to a phone call during which items are reviewed/verified
- Voluntary audit– you are asked to complete a standard form updating the exposures from your records.
The insurance company uses the updated exposures to calculate your final audited/earned premiums. This could result in:
- Return premium if original estimates were too high
- Additional premium if estimates were too low
- No change in premium if the estimates were spot on
How do audits help you?
- Your premium is accurate since it is based on true exposures
- You can budget for fluctuations in our business
- Workers Compensation classifications and claims are properly aligned so your MOD accurately reflects your experience
- Verify if officers are to be included or excluded from Workers’ Compensation and your policy has the proper endorsement
- Isolate executive pay as many states apply a minimum/maximum for executive payroll
- Make sure each employee has been properly classified
- Only very specific classifications permit splitting of payroll, otherwise payroll must go into highest rated classification
- Keep accurate records of any Benefit Plans of other special compensation
- Overtime is differentiated from regular payroll
- If you use sub-contractors be certain to obtain certificates of insurance validating the have their own coverage
- Keep accurate sales records for each separately classified operation
- Have your business and tax records available i.e.:
- Quarterly Federal (941 of 943); 1099, W2, W3
- General Ledger
- Payroll Journal
- Financial Statement