Rules are constantly changing.
Workers Compensation premiums are a major expense for most businesses. Although much emphasis 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 be an employee of the insurance company or an independent audit firm specializing in premium auditing. The independent 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, W2’s, 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 owes 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 operations and classifications. As a result, premiums can be overstated. It is advisable to prepare your summaries in advance for the auditor, and then discuss any changes made. Before the auditor leaves, make it clear that you will like copies of the auditor’s worksheets because sometimes the inside audit review staff at the insurance company makes changes to the worksheets. Compare the worksheets with your summaries and the final audit billing statement to make sure the payrolls and classifications match.
The audit is critical, as the information gathered is also used to calculate your “Renewal” premium. Since you renew the policy before the final audit is conducted for the expiring policy, insurance carriers often adjust the renewal midterm to use the classifications and payrolls obtained on the most recent audit. So, if payrolls are overstated or classification assignments incorrect, there may be two policies that are 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 obtain copies of the final audit worksheets used to determine your premium and check them for accuracy.