Many types of commercial insurance carriers base their premium on many different underwriting factors including exposure. An insurance audit is the foundational tool for risk management, compliance, and maintaining the integrity of the underwriting process. For example: A Business that does $1,000,000 of something will carry 10 times the exposure of a business that does $100,000 of something. The most common insurance that have has this basis is General Liability or Workers Compensation, but can also apply to Commercial Auto, Property coverage, and even Umbrella coverage.
What is an Insurance Audit?
An Insurance Audit is the retrospective review conducted by an insurance carrier to verify the actual exposure base against what was estimated when the policy was issued. An Audit is typically completed at the end of the policy term to verify that the clients are meeting these contractual requirements and to help carriers remain compliant with state and federal regulations
When does an Audit Occur?
- At Inception – A client will provide the basis for the rating of the policy to the insurance company. This is an estimate for the coming future policy year based on annual sales, payroll, and/or subcontractor costs.
- At the end of the policy term – The insurance company has the right, and the business has the obligation to provide the actual numbers for the previous year. The premium may be recalculated based on the original rates resulting in a difference in premium to be invoiced or refunded. If the resulting exposure is significantly different from the original estimate, it might make sense to endorse the renewal policy to the more accurate exposure to avoid this late term lump sum premium.
How are Audits Conducted?
1. Voluntary Audit – The insurance carrier will provide a form for the client to provide the exposure data.
2. Physical Audit – The insurance carrier sends an insurance auditor to go through exposure with the client at the clients office.
What a client may need to provide during an Audit
1. Annual Sales
2. Annual Payroll
3. Annual Units Sold or Used
4. Subcontractor Cost on the nature of the business.
The Bottom Line
For a client it is advisable to have a good grasp on the exposure used in the rating of their policy. For the Insurance Carrier, Audits are critical in maintaining risk, actuarial soundness, and ensuring equity across policyholders. The process protects both the insurer and the insured.
