Insurance Premium Audits -Tool For Managing Cash Flow
Audit... a term all business owners have seen before and often consider a bad thing. But, when used properly an audit can become an opportunity to help conserve cash flow at key times during the year. Whether your audit experience has been positive or negative, there are a few ways to properly organize your records and prepare documentation to effectively manage an insurance premium audit in your favor. As you may know, audits can pertain to your general liability, auto or workers' compensation policies and there is always a risk that additional premium could be due in-full at the end of the audit.
Why Do Carriers Perform a Premium Audit?
Auditing is actually an important step in the insurance carrier’s process. An audit provides the opportunity to ensure they understand the risk and exposures of an account, and have been charging the correct premium. When we reference exposures, we are referring to the revenue, sales, payroll or number of units that the carrier will use to rate your general liability, auto and workers’ comp polices. The audit will verify these numbers compared to the original premium quote. In addition, the auditor will typically review the class codes for each policy. Class codes are a standardized way to describe the insured operations or work that the insured performs. This review will account for any new or ceased operations that have taken affect during the policy period, rather than re-quoting the policy each time there is a change.
The audit can also be an efficient tool for the carrier to meet with the insured face-to-face, which can build relationship and trust in the company, its management team and operations for the carrier.
There are a few steps that an insured can proactively address to help reduce the chance that an audit will be completed incorrectly or carry a hefty additional premium.
As the renewal or quoting process begins, it is important for the client to review the exposure projections on your auditable policies. It may be tempting to use the same figures as the previous year, but overlooking the numbers could result in an error down the line. A few factors to review in this process are revenue and payroll growth, industry health and historical statistics. Once the exposures are decided and your insurance quotes are bound, the carrier will expect the final audit to be close to the projection. While this step is in the insured’s control, the most important factor is the business environment for the insured’s industry.
There are two items outside the insured’s control that can drastically affect your business and your insurance policies:
An industry downturn is typically unexpected and companies can experience a strong reaction. Lay-offs, reduced fees, reduced hours or minimal available work can all be side effects. This could leave your company a much higher premium compared to your reduced workforce or exposures.
On the other side of this, your company could also experience a period of rapid expansion where demand is high and the work is endless. In this case, you could be hit with a large audit at the end of the policy term. Audits are typically due in-full and this could put some pressure on your company’s cash flow.
With these situations in mind, The Gibraltar Group has an important step in our insurance process called a mid-term audit. We reach out to each of our clients and have them provide the to-date exposures six months into their policy. We evaluate the numbers and determine if there has been a significant change. If there is a deviance from the projected exposures, we can typically negotiate with the carrier. We can add or delete payroll by endorsement which can adjust the premium mid-term, or in some cases they can re-rate the premiums all together. These solutions can save your company premium in a time of downturn, or help with cash flow by increasing the premium mid-term in a time of growth and expansion.
Following these steps will help reduce the chance of a large audit bill, but there is still a chance a client will have to dispute an audit if a mistake takes place.
One of the most important factors in preparing for an audit is having good records. If the auditor is having trouble differentiating between the exposures, they typically place that exposure in the most expensive class code which can be costly to your company. Good records can also support your case if there is a dispute on the audit. Auditors can make mistakes and having the correct documentation can quickly resolve the problem.
The documentation needed can differ among general liability, auto and workers' comp. The general liability is typically rated on revenue, sales or payroll, broken down by each class code or type of operation. Providing a revenue breakdown in a clear and neat fashion can help the auditor accurately complete his job. If the auto policy is based on amount of units or miles, a current vehicle list or the most recent IFTA reports can suffice for the audit. The workers' comp audit can be the most complete in reviewing the payroll calculations. Most workers’ comp auditors will request to see the following:
- Description of Entities and FEIN
- Employer's Quarterly Tax Return Forms (Form 941 or 943 reports)
- Payroll Breakdown for each Employee and Position
Having these three items available for the auditor will help the process move forward. There are also some exceptions to keep in mind. The auditor should only account for 2/3 of overtime for an employee per Texas regulations. Owners and officers can also cap their payroll at $62,400 which is an important factor and can reduce premium if handled correctly.
Resources to Ensure Success
With these items correctly organized and with The Gibraltar Group’s guidance on evaluating your projected exposures, mid-term exposures, and the final audit numbers, you can feel confident that your audits are completed accurately. Our goal is to transform the risk of an insurance premium audit into a competitive advantage that maximizes your cash flow and helps your company operate more efficiently.
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