Premium Audit
A premium audit is a review process conducted by insurance companies to verify that the actual exposure data matches what was estimated when the policy was written. It ensures that the premium charged accurately reflects the policyholder's actual risk exposure, often resulting in additional premium charges or refunds.
Example
“After the policy year ended, the construction company underwent a premium audit where the insurer reviewed their actual payroll and project values to adjust their workers' compensation premium.”
Memory Tip
Think 'PREMIUM AUDIT' like a final exam grade check - they review your actual 'performance' (exposure) versus initial estimates to calculate the final 'grade' (premium).
Why It Matters
Premium audits ensure you pay the correct amount for insurance coverage based on your actual business operations rather than estimates. This process protects both you and the insurance company from overpaying or underpaying premiums, ensuring fair pricing based on actual risk exposure.
Common Misconception
Business owners often fear premium audits as punishment or assume they'll always result in additional charges, when audits can actually result in refunds if actual exposure was lower than estimated. Some also think audits are optional or can be avoided, when they're typically required contractual obligations for commercial policies.
In Practice
ABC Plumbing estimated $200,000 in annual payroll when buying workers' compensation insurance, paying a $8,000 premium. During the year-end audit, actual payroll was $250,000. With a rate of $4 per $100 of payroll, their correct premium should have been $10,000. The audit results in an additional $2,000 charge. If payroll had only been $150,000, they would receive a $2,000 refund instead.
Etymology
Combines 'premium' from Latin 'praemium' meaning 'reward' with 'audit' from Latin 'auditus' meaning 'hearing,' reflecting the practice of examining and verifying premium calculations that began in early 20th century commercial insurance.
Common Misspellings
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Related Terms
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See Also
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