Insurance audits are often seen as a confusing process, but they are a crucial part of the insurance industry. These audits play a pivotal role in ensuring that insurance companies accurately assess and charge premiums, helping them maintain solvency while providing the necessary protection to their policyholders.
What Are Insurance Audits?
Insurance audits are systematic examinations of an insured entity’s financial records, policies and procedures by the insurance company. These audits help insurance providers verify the accuracy of the premium payments they receive from their policyholders. They ensure that the premiums charged align with the actual risks and exposures faced by the insured party. Essentially, insurance audits aim to maintain fairness, transparency and financial stability within the insurance industry.
How Do Insurance Audits Work?
The insurance audit process may involve several steps, including the following:
- Information gathering—At the start of the policy term, the insured party provides their estimated information, such as payroll figures, revenue or number of vehicles in a fleet, to the insurance company.
- Midterm changes—If there are significant changes in the insured entity’s operations during the policy term (e.g., increased staff or revenue), the policyholder must inform the insurance company promptly.
- Audit request—Following the policy term, the insurance company may request an audit to reconcile the estimated data with the actual figures. The insured party provides access to financial records, payroll reports, and other relevant documentation.
- Review and adjustments—Insurance auditors carefully review the provided information and adjust the premium accordingly. If the actual data is higher than estimated, additional premiums are due. Conversely, if the actual data is lower, the insured may receive a refund.
- Ongoing recordkeeping and compliance—Policyholders must maintain accurate records and comply with reporting requirements throughout the policy term to avoid potential disputes during the audit.
Why Are Workers’ Compensation Insurance and Liability Insurance Subject to Audits?
Workers’ compensation insurance and liability insurance are among the types of coverage often subject to insurance audits due to their unique risk factors. Consider the following:
- Workers’ compensation insurance—Audits may be necessary to determine accurate premium rates because the cost of workers’ compensation insurance is directly related to a company’s payroll. As the number of employees and their wages fluctuate, regular audits ensure fair premium calculations.
- Liability insurance—Liability insurance covers various risks, such as general liability and product liability. Accurate underwriting is essential to ensure the insurance company charges a fair premium based on the size and scope of a business’s operations. Liability insurance audits help identify any changes in risk exposure and adjust premiums accordingly.
We’re Here to Help
The knowledgeable professionals at Lupton & Luce are here to help businesses and policyholders in the Long Island and Riverhead areas understand the insurance audit process and ensure they maintain appropriate coverage. Contact us today to get started.
This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.