September/October 1996
A premium audit can give you a more precise picture of your insurance status and could potentially reduce your premiums. With the policy-renewal season imminent, it’s a good time to learn the basics of this auditing approach.
By James Cicero
James Cicero is vice president of marketing for the commercial lines group of CNA Insurance Cos. (Chicago).
If you’re like many people in today’s business world, you think of an audit in only one way—as a complete examination and reporting of a company’s finances and operations. But there are other types of audits that can help gauge where your business stands.
One of those is an insurance premium audit, which is designed to provide an accurate valuation of the risks facing your firm and the appropriate consequent insurance costs. With this knowledge, you and your insurance carrier can verify that your company is grouped in the correct insurance classification—an important criterion for determining insurance premium charges—and ensure that your premium more accurately reflects your true insurance costs.
The way a premium audit works is generally like this: At the end of the policy premium period, auditors from or hired by the insurance carrier do a “reality check” of sorts, comparing your firm’s actual sales, receipts, and/or payroll against the original estimates that were used to determine your premium. If the actual figures are lower than were estimated, you’ll receive a refund for the difference between the premiums for the actual and estimated totals. Of course, if the actual numbers are greater, then you’ll be charged an additional amount to cover the higher premium, one that accurately reflects your elevated sales, receipts, and/or payroll.
Understanding the Types
Premium audits can be conducted in several insurance categories that are of importance to the scrap recycling industry, namely workers’ compensation, general liability, and automobile liability. Within these categories, there are three types of premium audits, and which one your business requires depends on a number of factors.
Physical Audit. A physical audit requires the disclosure of your company’s basic business and financial records. In this instance, an auditor—either an insurance company employee or an employee of an independent company contracted by the insurer to conduct the audit—visits your business to review such records as payroll, receipts, or other data.
Voluntary Audit. Under a voluntary audit, an auditor does not visit your company. Instead, the audit—and, eventually, your premium—is based on written information you provide to the insurance company, using forms provided by the carrier.
Interim Audit. An interim audit, necessary on only some policies, is a voluntary audit that requires reporting on a specific schedule, such as monthly, quarterly, or semi-annually.
Preparing for an Audit
The information required for a premium audit is usually standard and available from your daily business records, such as journals, ledgers, tax reports, individual payroll records, vehicle titles, and appropriate certificates of insurance. If your accounting records are in order, the audit should require no significant additional record-keeping.
Exactly which of those accounting records will be necessary for the premium audit will vary, depending upon the nature of your business and the kind of insurance coverage subject to the audit.
Scrap recycling companies that fall under the heading of mercantile businesses generally need to provide information showing total sales, with deductions for sales taxes paid, credits for returns, and finance charges earned.
Scrap firms that more closely operate as manufacturing businesses, meanwhile, usually must use their total payroll base for an audit. Records provided for the audit should include wages, commissions, bonuses, holiday pay, vacation pay, sick pay, and incentive payments such as piecework pay, profit-sharing, and clothing and transportation allowances. Overtime pay should be reflected in a separate account.
For all businesses, contractor and subcontractor relationships require special attention. In general, the total cost of contracts with independent subcontractors must be recorded and reported. Subcontractors should provide you with evidence of a certificate of insurance for workers’ compensation, general liability, and automobile liability. If subcontractors fail to present you with evidence of such coverage, or you do not require them to do so, then the burden of insuring a subcontractor’s employees will be transferred to your payroll, as the principal business, which could increase your insurance premiums.
Armed with this knowledge of premium audits, you need not fear the process and can view it as a vital tool to the continued health of your business. •
A premium audit can give you a more precise picture of your insurance status and could potentially reduce your premiums. With the policy-renewal season imminent, it’s a good time to learn the basics of this auditing approach.