Compensation premiums are a major expense for most businesses today.
Although most emphasis for reducing the costs of this government mandated
coverage has focused on claims handling and loss prevention techniques,
very little has been written regarding the premium audit function. Since
the final earned premium is determined at policy expiration with a review
of your payroll records, it is essential that the audit be conducted
properly. Advanced preparation and a thorough review of the policies,
final audit invoices, and auditor's worksheets will help minimize premiums.
Why do insurance companies conduct audits? When the policy is issued,
the premium is an estimate. The estimate is based on projected payrolls
and the classification for the type of work you do. Each classification
has a different rate per $100 payroll. Most businesses are generally
assigned one "Basic" classification that best describes its operations
within a state. In addition, several additional classifications known
as "Standard Exceptions" are available for clerical, salespersons, drivers,
draftsmen, and telecommuter employees.
Once the policy expires, the insurance company will make arrangements
to conduct a "Final Audit." This right is granted under Section 5.G
of the policy, and allows the carrier up to 3 years to perform the audit.
Final audits are conducted over the phone, by mail, or in person by
an authorized representative of the insurance company. The auditor may
work for the insurance company as an employee, or may be an independent
audit firm known as a "Fee Auditor." The fee auditor is paid an hourly
rate to conduct the audit. Auditors do not get commissions or fees based
on the premium developed.
During a physical audit, the auditor will arrive at your business and
examine payroll records, tax returns, check books, and other pertinent
documents in order to obtain the actual payrolls and classifications
for the policy period which just expired. Payroll is generally used
as the basis of premium because it is measurable and can be verified
to outside sources (tax returns, time cards, registers, W2s, etc.).
The actual figures are then compared with the estimated exposures as
shown on the expired policy. If your payrolls increased, you normally
get a bill from the insurance company showing the "Additional Premium"
due. If your payrolls went down, the insurance company owed you a "Return
Premium." Due to time constraints, the audits are often completed off
premises or without the auditor taking a tour of your operations to
verify classifications and operations. As a result, premiums can be
The audit is critical, as the information gathered is also used to
calculate your "Renewal" premium. Often, your current policy is adjusted
midterm to use the classifications and payrolls obtained on the most
recent audit. So, if payrolls are overstated or classification assignments
incorrect, your "In Force" policy may also be wrong. In addition, the
information gathered on the final audit is sent to the NCCI or other
rating organizations to calculate experience modifications and for ratemaking
and statistical purposes. Always ask for a copy of the final audit worksheets
used to determine your premium, and check it for accuracy.