Insurance Audit

Jamnalal Bajaj Institute of Management Studies

By:
Suvarna Gurav 12F238
Greta Miranda 12F312
Lennon Rosario 12F333

Insurance Audit

Introduction
The insurance industry is divided into two major classes of business, long term business such
as life assurance and pensions, and general business such as household insurance, car
insurance etc; and insurance organisations can do one or the other or both. In addition
there are specialist companies called reinsurers who accept specific risks from both the life
and general companies. Consequently we have the following structure:

Life assurance organisations

General insurance companies
Composits - these are organisations that write both life and general business
Reassurance/reinsurance companies

Insurance Audit
Insurance audits are typically performed on commercial insurance policies providing
automobile, general liability, garage liability, umbrella and workers compensation
coverages. When these policies are issued, you are asked to pay an estimated, or deposit
premium. Estimated premiums are based on the nature of your business and your
estimated annual exposures (i.e. payroll, gross sales or receipts, cost of sub-contractors,
etc.) for the policy term.
Once your policy expires, the insurance company will conduct an audit to collect
information on the actual exposures and operations for the policy term. They then
determine the actual earned premium. Premium adjustments are then determined by
comparing the audited exposures and operations with the original policy estimates.
WHAT RECORDS ARE NEEDED FOR THE AUDIT?
Its important for you to maintain payroll, overtime, sales and cost summaries preferably
on a monthly, quarterly and annual basis. Your records are very important to the audit
process. They provide and verify information, save time and minimize your insurance costs.
The auditor will let you know which of the following records will be needed for your audit
when the audit appointment is made.
PAYROLL RECORDS include payroll journals and summary, federal tax reports (941s), state
unemployment reports and individual earnings records. Totals should be kept for overtime
when applicable.
EMPLOYEE RECORDS include the number of employees and hours, days or weeks worked
annually.

 SALES JOURNAL includes all goods or products sold, rented and/or distributed as well as
service, repair and installation. Sales or excise taxes collected separately and submitted to
the government need to be identified in order to be excluded.
CASH DISBURSEMENTS show subcontractors, materials and casual labor.
CERTIFICATES OF INSURANCE show the subcontractors used during the policy period for
construction, erection and/or structural alteration for general liability and workers
compensation insurance coverages. They are also used for commercial automobile hired
auto coverage.
INCOME STATEMENTS include subcontracted costs used to determine the cost of hired
autos for commercial automobile audits.
WHEN AND HOW WILL THE AUDIT BE DONE?
The insurance company will collect audit information from you shortly after your policy
expires.
Smaller, less complex policies may only require that you assemble and send the necessary
information to the insurance company, or have the information available when a telephone
auditor calls.
Larger and more complicated policies are generally assigned to a field auditor, or
independent auditing firm, who will schedule an appointment with you shortly after the
policy expires. If you must change or cancel a scheduled appointment, please let the auditor
know as far in advance as you can. Its best to schedule and complete the audit within 30
days from the date you are contacted by the auditor.
It is important for the auditor to ask questions about your operations. If you cannot be
present to answer questions, someone who is familiar with the specifics of your entire
business should be available.
If you direct the auditor to your accountant, they will obtain as much information as
possible from him/her and contact you for any additional questions.
Most audits take an average of a half hour or less, but audits of larger policies may take
longer. Though the auditor will have a number of questions, you will not have to be directly
involved during the entire audit if adequate records are kept and made available.
HOW CAN YOU SAVE MONEY?
There are several ways you can save on premium money depending on the type of business
and coverages that you have. Not all of the following may apply to your particular business.

 PAYROLL DIVISION A single employees payroll can be divided, except when the
employee works in a clerical or sales position. Proper records must be kept, in dollar
amounts, that reflect work actually performed before a breakdown can be applied. Without
adequate records, the entire payroll for the employee must be placed in the highest rated
classification.
EMPLOYEE TIPS Tips declared by employees may be excluded from their gross payroll
only if separately identified.
CERTIFICATES OF INSURANCE Have certificates available for the audit at your premises
(or your accountants) to ensure that charges are not made unnecessarily. Certificates must
cover the period when the subcontractor worked for you. This may require certificates
covering two different policy terms for the subcontractor in some cases. For commercial
automobile hired auto coverage, certificates of insurance covering the insured on a directprimary basis will reduce rates by 95%.
DRIVERS (For general liability coverage) employees with the sole responsibility of driving
may often be excluded from chargeable payroll if their wages are shown separately.
However, employees who perform other duties besides driving must be placed in the
highest rated class describing their duties.
COST OF HIRE is commonly used on commercial automobile policies as a premium basis
for hired auto coverage. This includes automobiles and trailers used under contract on
behalf of or loaned to you, which may include rental units as well as subcontracted hauling
done for you.
Your business is unique. You can request a preliminary audit, at any time, to pinpoint factors
that could help you find ways to control your insurance cost. If you have questions about
how your specific circumstances will affect savings

WHAT IS AN INSURANCE PREMIUM AUDIT

An insurance premium audit is a provision of your policy contract. The purpose of the
premium audit is to develop actual exposures (usually payroll or sales) that are properly
classified in accordance with manual rules and regulations. This information will be used to
determine your final premium.
Most states require premium audits to be conducted to confirm the final premium and to
ensure accurate statistical data for rate-making purposes.
WHEN IS A PREMIUM AUDIT PERFORMED?
It is usually performed shortly after policy expiration, but can also occur early in the policy
period to verify the accuracy of estimated exposures.
It is also performed after policy cancellation, to determine your final earned premium for
the shortened policy period.
Audits will typically occur on an annual basis, but can be done every second or third year as
determined by your carrier, and can go back as far as 3 years.
HOW WILL MY PREMIUM AUDIT BE CONDUCTED?
Your insurance carrier will determine the best method to conduct your premium audit
based upon the size and complexity of your business operations.
The most typical methods are:
A physical visit to your business premises to review actual records and operations.
A telephone audit, after receiving certain information requested from you in advance of the
audit. The information provided will be verified over the phone.
A voluntary report in a specified format that you will complete.
HOW DO I PREPARE FOR MY AUDIT?
The objective is to make the audit process a positive experience. Having the appropriate
records available for the audit will allow the auditor to complete the process smoothly. For
physical audits, you will be contacted by letter or phone to schedule a date for the audit
appointment and you will be requested to provide certain records.
The Audit Process
Our Records Checklist indicates the most typical records requested for an audit. These
records will help in determining the appropriate classification(s) and correct reportable
exposures. If a phone or voluntary audit has been requested, you may be asked to
complete a voluntary form and return it by a specified date.

ORGANIZE YOUR PAYROLL RECORDS

Accurate records that are complete and well organized make the audit process much easier.
Your advance preparation will help the auditor quickly find what he or she needs and will
require less of your time for questions and/or clarifications during the actual audit. Payroll
records used for an audit should be organized to clearly show payroll by:
Policy period
Classification code (List each type of job separately, i.e. clerical, sales, etc.)
Separating overtime from regular pay
REQUEST CERTIFICATES OF INSURANCE FROM YOUR SUBCONTRACTORS
If you have subcontractors working for you, you should always ask them to provide a
current Certificate of Insurance. This is critical information to provide the auditor at the time
of your audit and could help to avoid possible additional premium charges.
YOUR GROSS PAYROLL
Gross payroll is the amount of payroll prior to any deductions. It includes items such as a
401(k) or cafeteria-style plan which may reduce the employees taxable income. Payroll for
workers compensation or general liability purposes may not be the same as payroll
reported for tax purposes. Examples of items commonly included in the payroll basis for the
audit are:

Wages and salaries

Bonuses and Stock Bonus plans
Vacation, Holiday, and Sick pay
Commissions
Profit sharing
Payment for piece work
Salary Reduction plans, Savings plans, Retirement or Cafeteria plans
Substitutes for money which may include goods, board and lodging, meals, and the
reasonable cash value of any non-cash item used as payment of wages.

The following are examples of the most common payroll exclusions (not inclusive.)

Tips
Severance pay
Premium Overtime
Exercised stock options

BE AVAILABLE FOR QUESTIONS

The owner of the business should be available to speak with the auditor to answer
questions and review the results of the audit. If the owner is not available at the time of the
audit, the auditor will need to meet with someone who has a thorough knowledge of the
business operations. The auditor is also available to answer any questions you may have
about the audit process.
YOUR AUDIT RESULTS
All information obtained will be kept in strict confidence and reported only to the Insurance
Carrier servicing your policy. You will receive an audit statement from your insurance carrier
shortly after the audit is completed. If you disagree with the audit findings, please contact
your agent directly for assistance. Your agent will instruct you as to whether a formal
dispute is necessary. In the case of a formal dispute, you would need to provide specific
documentation as to the reason for any dispute along with associated back up
documentation.