Premium Audit
A review process conducted by insurance companies to verify the accuracy of premium calculations, typically for business insurance policies. The audit ensures that premiums paid match the actual risk exposure, such as payroll amounts, sales figures, or number of employees.
Example
“The workers' compensation premium audit revealed that the contractor's actual payroll was higher than estimated, resulting in an additional premium charge of $3,200.”
Memory Tip
Premium Audit = 'Pay Right Amount Using Data Investigation Today' - it ensures you pay the correct premium based on actual business data.
Why It Matters
Premium audits ensure fair pricing for business insurance by basing final costs on actual operations rather than estimates. They protect both insurers from undercharging and businesses from overpaying, leading to more accurate insurance costs that reflect true risk exposure.
Common Misconception
Business owners often view premium audits as attempts by insurers to collect extra money unfairly. In reality, audits can result in refunds when actual exposure is less than estimated, and they ensure businesses only pay for their actual risk level.
In Practice
ABC Construction estimated $500,000 in annual payroll when purchasing workers' comp insurance, paying $5,000 in premiums. During the year-end audit, actual payroll was $600,000. The audit results in an additional premium of $1,000 (20% more for 20% higher payroll). If payroll had been only $400,000, ABC would receive a $1,000 refund instead.
Etymology
Combines 'premium' from Latin 'praemium' and 'audit' from Latin 'auditus' meaning 'a hearing.' The practice developed in early 20th century commercial insurance when companies needed to verify changing business exposures.
Common Misspellings
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