The premium audit: Calculating a fair price

calculator-and-ledgerInsurance coverage you select now covers your business during a future term. The rates you pay for coverage are intended to reflect your business’s actual exposure to risk during that future term.

For some lines of insurance, like workers’ compensation, general liability or garage liability, exposure is measured by your payroll and sales and other factors that can be difficult to predict precisely. What happens if you overestimate – or underestimate – future payroll, sales, subcontracting cost or other variables? How can you be sure of paying a fair price?

Premium audit is the answer

When insurance policies are issued, an advance premium puts coverage in force based on estimated payroll and sales. Your insurance carrier will provide for a premium audit that makes it possible to continue your protection during the policy term and adjust the premium later, if necessary, according to audit results.

Pay only for coverage you need

At the end of the policy term, an audit may show that the basis of premium for your policy, such as payroll or sales, was actually higher or lower than estimated. If so, protection at the appropriate level is funded by an additional premium payment when your payroll or sales are higher than estimated. Or, you receive a return premium when those factors were overestimated.

Preparing for your audit

Don’t worry about your audit: the professional auditors who inspect your records treat all information confidentially. With their cooperation, your normal office routines can remain undisturbed.

You can save time and money by providing good records and arranging them to your advantage. You will need:

  • Payroll records, including your payroll journal and summary, state and federal tax reports or individual earnings cards.
  • Cash disbursements and expense records.
  • Sales journal or receipts records for all goods or products sold, rented and/or distributed as well as for all service, installation and repairs.
  • General ledger and financial statements.
  • Certificates of insurance for any subcontractors or hired truckers used during the policy term.
  • Copies of executed subcontractor agreements.

The more accurately you estimate your risk exposures at the beginning of the policy term, the less likely the audit will reveal underpayment or overpayment. While no one can predict the future, here are a few suggestions to prepare for your audit throughout the year:

  • Break out employee overtime and tips in dollars for proper credit to gross payroll.
  • Break out sales tax and freight income for proper credit to gross sales.
  • Make sure employee records are kept according to the type of work performed.
  • Break out sales records for each different operation in your business.
  • Maintain copies of certificates of insurance for every subcontractor. Without this proof, subcontractors may be treated as employees of your business for insurance purposes.

Contact your independent agent with questions about the premium audit process. And remember, your agent is prepared to advise you about how changes in your business could affect premium or coverage needs.

Submitted by Michelle Olson

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