Commercial Insurance Audits

5-Feb-2015 Gordon Atlantic Staff

Commercial Insurance Audits

Insurance Audits

Commercial Insurance premium is based on how much activity a business has; the more activity, the more exposure to loss and the higher the premium.

How do insurance companies price insurance? At the beginning of the policy term, we estimate the "exposure" (payroll, gross income, units sold, admissions, etc.) used for a particular industry. That exposure basis is applied to a rate for the business, based on their industry, for an annual cost. At the end of the policy term the insurance company may conduct an audit to determine the actual exposure (as opposed to the estimate, which is never exactly right, and subject to gaming. Audits ensure that your insurance premium is based on your individual, actual level of activity. It's the reconciliation between estimated and actual.

The three most common measures of exposure are:

Gross Payroll – Includes wages or salary, commission, bonuses, overtime, holiday, sick and vacation pay as well as the value of housing if provided for employees. Overtime is adjusted back to straight time if records total overtime paid by job type/rating class code. (Workers comp always uses payroll as its rating metric)
Gross Sales – Includes income for all goods and services provided. Deductions include sales tax, the value of merchandise returned and freight charges, if freight is a separate item on your customer invoices.
Subcontract Labor Cost – Total cost of all labor, materials and equipment furnished and used to produce your product or service.

Tips for preparing for your audit:

Have the auditor send you a list of all information required for the audit.
Prepare your records so you can take advantage of allowable deductions.
If you hire subcontractors, store their Certificates of Insurance for each with policy dates that span your entire policy term (you may need two Certificates on each subcontractor to span the term).
Restaurants and retail stores customarily report gross sales of food and alcohol separately.

Tips for the audit appointment:

If you prefer an exact appointment time and not an appointment “window of time” ask for the first appointment of the day. Being the first appointment means you won’t be kept waiting because the audit before you took longer than expected.
Provide the auditor a work area that has enough space for your records and a laptop computer. Providing a good work area reduces the time it takes to conduct the audit and reduces the risk of errors.
Auditors may ask questions that don’t appear to be relevant such as gross income on an audit based on payroll. Insurance companies use gross income to judge if the payroll is credible, so even though the policy is rated on payroll, they may ask for this figure.
If the auditor asks you to sign an authorization to release the audit worksheets to your agent, sign the form as it will expedite the process if you dispute the audit.
Finally, auditors are paid to audit, not try to audit; their income is based on the number of audits they conduct. Time spent by an auditor making multiple calls to schedule the audit with you, or waiting for records during the audit, takes time away from their ability to identify and apply credits you’re due to reduce your premium. The same auditor may conduct your audit year after year, so building a good relationship with him or her could save you money!