Why are Insurance Premiums Audited

Insurance policy audits are conducted yearly for all businesses.

Preparing for the audit can make the difference between a ‘bad audit’ experience or a good one. Avoid the potential stress, lost productivity, increased premiums, or possible policy cancellations by preparing for your audit.

What is an insurance audit?

Policies are audited to ensure that the premium charged by the insurance company reflects their actual exposure, which was estimated at policy inception.Insurance audits are performed by employees of the insurance company or independent auditors hired by the insurance company; in some cases, forms will be sent to the business for a ‘self-audit process. In all cases, the business must prepare information and utilize the time of its employees to respond to the audit. The level of personnel required varies based on the company’s size. Personnel required might include the Office Manager, Accounting Manager, Controller, or external CPAs. Data is collected and provided to the insurance auditor by the company personnel.

What is the auditor looking for?

Insurance companies audit certain Liability policies and ALL Workers’ Compensation policies. The audits collect exposure information estimated when the policy was written and compares it to the actuals. This data is then used for determining and adjusting premium amounts. Information typically (though not exclusively) required includes the following:

  • Liability Policies
  • Gross company sales 
  • Independent contractor costs (insured and uninsured)
  • Payroll for certain types of exposures
  • Workers’ Compensation Policies
  • Actual employee payroll

Cost of independent contractors if no certificate or proof of other coverage is provided This information may be in the form of payroll records, Federal Form 941, Financial Statements, Check Registers, and Certificates of Insurance from contractors/vendors. A company’s use of contractors can be determined by the information disclosed in the financials or check register. Contractors/Vendors that do not have valid insurance certificates proving independent coverage will be added to the company’s exposure totals. Not only do they possibly uninsured contractors/vendors increase a company’s exposure to loss, but they can also cause significant increases in their premiums.

What makes for a ‘good audit’ experience?

The main requirement for a ‘good audit’ experience is having all the information requested readily available for the auditor when they arrive on the premises. This includes easy access to contractor certificates of insurance demonstrating that the coverage is current and meets required limit levels. The upfront preparation and organization by the company can prevent ongoing audit responses and adjustments later on. Another ‘good audit’ experience is no surprises such as large premium adjustments, amounts due, or returns after the audit is complete.

What makes for a ‘bad audit’ experience?

If the company cannot readily access the requested data, a variety of unwanted events can occur including:

Excessive waste of time for the auditor and company personnel

Company (Policy holder) gets a bill for a large additional premium for the audit period and next period

Company must immediately contact contractors requesting certificates and forward to the auditor for premium adjustments, requiring significant time for both parties.

What are the potential consequences of a bad audit?

The results of a bad audit can be severe, especially if the audit resulted in additional premiums. Policies may be canceled due to non-payment of the additional premium or for non-cooperation in the audit process. The company could have their credit affected. Staff will need to dedicate additional time to correct or adjust audit discrepancies, resulting in lost productivity and a disruption of the work routine. An insurance company could cancel the easy ‘self-audit process and insist on ‘in person’ audits.

How do you avoid a ‘bad audit’ experience?

Two words – be prepared. Understand what is auditable and what the audits are based on. Have the requested financial information available for the auditor. Present up-to-date insurance certificates for all vendors and contractors indicating limits meet requirements and coverage dates are current. Be sure the certificates are tracked and kept up to date. The best way to manage contractor certificates is by maintaining an automated certificate tracking system that provides policy expiration notices and allows you to attach images of the certificate for quick access during the audit, helping to avoid unnecessary adjustments to the premium. Automated systems – notably insurance and vendor tracking software – are available on the market to help in this process.

To survive your insurance audit, make sure you know what the auditor wants in advance, collect and organize the information and be ready to find additional data quickly. Avoid the pitfalls and surprises of the ‘bad audit’ experience!

What is the purpose of an insurance audit?

To determine the worthiness of an insurance policy. he audit processes started around 20 years ago, and the premise for the audits were a health insurance policy would provide a financial security to the policyholder in the event that the insured got ill. The audit process essentially shows that a policyholder has a more permanent position in the insurance industry and provides more benefits than the actual premiums of the policy.


How much is the insurance audit?

typical audit entails following a typical process, which includes assessing the reasonableness of the premium, the health insurance policies the policyholder has obtained for the last 2, 3, or even 4 years.

How much does an insurance audit cost?

It is worth noting that the cost of the insurance audit depends on how long the audit has taken, the insurance policies the policyholder has obtained over a certain period of time and even the type of insurance policy the policyholder obtained.

ecause of the lengthy process of an insurance audit, insurance audit is seldom conducted for individual insurers as most of the policyholders get similar results within a few minutes. Many insurance companies already have their audits going on.

Is insurance audit required for a particular insurance policy?

No, insurance audits are not required for individual insurance policies. The insurance audit has been mandated by law in some countries. Some of the countries where insurance audit is mandatory include the Netherlands, Australia, Singapore, Hong Kong, New Zealand, Canada and the United States.

However, for a comprehensive insurance audit to be done, it is worth noting that all insurance companies, as well as insurance agents and intermediaries that sell policies, need to be involved in the audit process.

Insurance Audits are Needed to Handle Different Types of Insurance

One thing to note is that insurance audits involve different types of insurance policies, in which the audit process may be of different lengths. This makes insurance audits 

different from each other.

The types of insurance insurance audits are also split into three categories, which are either similar to each other or of different lengths and type. However, the types do not 

necessarily matter as long as the audit is conducted and the audit results are presented to the insurance policyholder, according to the insurance company.

Covered Insurance Audit: Similar, Lengthy, Quick

A covered insurance audit basically involves getting an overview of the policyholder’s coverage under the insurance policy. It is similar to an insurance policy audit, but

takes longer than the other two categories.

Covered insurance audits essentially involve completing a health insurance policy audit that is done through a health insurance broker or insurance agent. Usually, insurance agents or brokers will get different insurance policies for the client from different insurance companies and they will get the audit reports to the client for feedback. The reason for getting the documentation from the broker or agent, rather than the 

insurer, is for the client to give a valid reason as to why the insurance company has

 not covered a claim.

The purpose of getting the auditor’s reports is to understand why insurance companies have covered the claim. Based on the findings, the client needs to give an argument as to why he should not get a refund.