Definition:Audit premium
📊 Audit premium is the final, adjusted premium determined after a premium audit reconciles the estimated exposures used to price a policy at inception with the actual exposures that materialized during the policy period. It is most common in commercial lines such as workers' compensation, general liability, and commercial auto, where the rating basis — payroll, sales revenue, or unit counts — can fluctuate significantly over twelve months.
⚙️ At the start of a policy, the insurer calculates an estimated premium based on the policyholder's projected exposures. After the policy expires (or at designated interim points for larger accounts), an auditor reviews the insured's financial records — payroll registers, tax filings, sales ledgers, subcontractor certificates — to determine what the actual exposure base was. The audit premium is then computed by applying the policy's rates to these verified figures. If actual exposures exceeded the estimate, the insured owes an additional premium; if they fell short, the insurer issues a return premium. The policy terms typically spell out the audit methodology and the insured's obligation to maintain adequate records.
💰 Getting the audit premium right protects both sides of the transaction. For insurers, it ensures that the earned premium accurately reflects the risk that was actually borne, preserving the integrity of loss ratios and reserve adequacy. For policyholders, it prevents chronic overpayment and supports accurate budgeting. Disputes over audit results are a frequent source of friction in the commercial insurance relationship, so carriers increasingly invest in data-driven audit tools and integration with insurtech platforms that pull real-time payroll or revenue data, reducing surprises and accelerating the close-out process.
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