How To Audit Insurance Company?

Isn’t the word “audit” the absolute worst? The IRS and government personnel are usually the first persons that come to mind when they think about financial investigations. An insurance audit, on the other hand, is a separate process and far less terrifying than an IRS audit.

By the end of this article, we hope you’ll have a better understanding of what an insurance audit is, why carriers conduct them, and how you can prepare so you’re not caught off guard.

What is an insurance audit?

An insurance audit is a means for a carrier to figure out how much risk they actually insured in the previous year. During the year that your policy was in place, the company could have undergone significant changes.

The premiums that carriers charge for general liability (GL) and workers compensation insurance are determined by a number of factors. Certain estimates that you self-report to the carrier, such as sales and payroll, are among the most essential of those criteria. They accept your word for it that these data are correct…at least for the time being.

The majority of GL insurance are priced primarily on the basis of sales “rating criterion.” During the application process, the carrier inquires about your predicted revenue for the next 12 months, and then issues the policy based on that information.

Payroll figures are used to price workers’ compensation (and, in some situations, general liability). Of course, the riskiness of the work that employees do is important, but that riskiness is represented as a number “The entire payroll for those employees is multiplied by a “class modifier” that is multiplied by…you got it…the total payroll for those employees.

If you expect $X in revenue and $Y in payroll, and those estimates treble the following year because business is booming, the carrier was taking on more risk than you paid for that year.

As a result, the carrier does an audit. They ask you for your actual numbers from the previous year, and then charge you the difference between what you paid and what the premium should’ve been, using the same rate that you were promised at the start of the year.

As a result, the price is shown as “estimated premium” or “advance premium” on these plans. It’s the most accurate estimate of the policy’s cost. Once the policy time has ended, the real price is decided.

What’s the timeline of an insurance audit?

  • You fill out an application that details the number of employees, their job titles, and the amount of payroll each position receives.
  • Your broker submits your application to a number of carriers, negotiates, gathers estimates, and then delivers them to you.
  • The carrier sends you a letter with a “audit worksheet” within 3 months (typically sooner).
  • You fill up the spreadsheet with your previous year’s real payroll. Let’s imagine it was 10% greater than anticipated.
  • The carrier examines the policy and then offers an endorsement, revising it and charging a higher premium.
  • You pay the additional fee if you agree with the audit results, and you’re ready to move on to the next year!
  • If you believe there was an error or misunderstanding, you can challenge the audit, and your broker can force the carrier to recalculate. Carriers will only undertake on-site audits in exceptional circumstances. There’s no reason to be concerned! This is often a brief meeting during which the carrier’s agent inspects the operation and double-checks the figures with you.

Here’s an example:

There are two categories of staff employed by a helmet company: clerical and testing. Employees in the clerical department send emails and crunch figures. The testers have a more distinctive duty in that they must determine the effectiveness of the helmets. Tester Joe is in the category of “dropping from ladders,” whereas Tester Susan is in the category of “look out, sledgehammer incoming.”

What are the steps an auditor should take in auditing of insurance companies?


While examining an insurance company’s investments, the auditor should bear the following provisions of the Insurance Act of 1938 in mind.

a. An insurance firm can only invest in securities that have been approved. It can, however, invest in securities that aren’t approved if the following conditions are met.

b. An insurer should not invest more than the minimum amount in insurance or investment company shares or debentures:

c. An insurer should not invest more than the minimum amount in shares or debentures of a company that is not an insurance or investment firm.

d. A private firm’s shares and debentures are not eligible for investment by an insurance company.

a. Insurance companies are prohibited from investing the funds of their policyholders outside of India.


  • For all active and inactive accounts, the auditor should get confirmation of Bank Balances.
  • Term Deposit Receipts issued by banks should be physically verified by the auditor. Generally, all cash is put as a term deposit with the bank at the end of the year.
  • The auditor should randomly review the deposits and withdrawals operations to ensure that the Account is only operated by authorized individuals.
  • He should double-check that funds in transit are accurately reported in a reconciliation statement.


The following are the audit processes that can be used to check an agent’s balance: a. Check to see if the agent’s balances and overdue premium account balances have been listed, evaluated, and reconciled for audit reasons. b. Check to see if big outstanding debts have been recovered in the post-audit period. c. Check to see if there are any outstanding debit or credit balances at the end of the year that need to be adjusted. Due to their nature, management may provide a written explanation. d. Confirm that the agent’s balances do not include the balances of his or her employees or the balances of other insurance firms. a. Verify that no commission credit is offered to agents for businesses that it has directly procured.

What do you need for an insurance audit?

The information listed below is typical of what an auditor might ask for during an audit. If a policy covers numerous firms or entities, the auditor will ask for this information for each company or entity separately.

  • Bonuses, commissions, holiday pay, sick pay, overtime pay, vacation pay, and all pretax sums are included in gross pay.

What do insurance auditors look for?

A general liability insurance audit looks at the payroll and risk exposure of your company. An audit ensures that you’re paying the correct amount for general liability insurance and that you’re obtaining enough coverage for your company.

What is final audit in insurance?

A final audit is a study of your payroll and business operations at the end of your policy to ensure that you were charged the correct amount for workers’ compensation insurance. It’s a standard component of the workers’ compensation process that ensures you only pay for the coverage you require. If an adjustment is required, you may receive a refund, owe more due to increased wages, or have no change at all.

How long do insurance audits take?

An audit is in the same category as a root canal for many business owners. Premium audits, on the other hand, are common in the field of workers’ compensation and are relatively short and painless.

Your workers’ compensation policy premium is calculated using the information you submitted during the application process. A final premium audit is performed at the end of your annual policy period to ensure that you paid the correct amount for your workers’ compensation insurance.

Actual payroll, operations, and job categories are used in the final premium audit. Based on the size and complexity of your business, your insurance carrier will select the appropriate way for conducting your final premium audit. There are a few different ways to conduct a premium audit, depending on your specific circumstances:

  • Premium Audit Online – EMPLOYERS policyholders have the option of completing their workers’ compensation premium audit online.
  • Remote Physical Audit – Business owners fill out a form with pertinent information and send it to their insurance company.
  • Phone – Business owners fill out a form with all of the required information and send it to their insurance provider. To finish the procedure, an auditor will perform a quick telephone interview.
  • Remote physical – To complete the audit, an auditor will require business documentation and perform a telephone interview.
  • On-site physical – An auditor will schedule an on-site visit to your business to conduct the audit. She may also monitor your business operations in order to further corroborate each job function’s classification.

The following are four frequently asked questions about the premium audit procedure by business owners.

  • What should I do to prepare for my audit? The most crucial step is to have all of the necessary records arranged and ready for your auditor. Your forethought will aid the auditor in swiftly locating the information he requires, resulting in fewer time and inquiries for you.
  • What kind of information is needed for the audit? Premium audits check to see if the company and its personnel are properly categorised. If you own a restaurant, for example, there are different company classifications depending on whether you provide wait service, fast food, or delivery. Employees are in the same boat. Distinct work functions have different classification codes, which impact how much you have to pay for insurance. During your audit, you will be asked to produce the following records:

Always ask subcontractors for a current Certificate of Insurance if they are working for you. Keep this on file and give it to your auditor in case you need to avoid paying more premiums.

  • What are the consequences if you don’t follow the rules? You agree to engage in a final premium audit as part of your insuring agreement with your insurance company. Surcharges for noncompliance are permitted or required in many states. If you refuse to participate with an audit, your workers’ compensation insurance policy may be cancelled.
  • How long does it take to complete an audit? When your coverage expires, your insurance company will begin the auditing process. The majority of audits are finished within 90 days of your policy’s expiration date. Providing your insurer with the needed supporting documentation as soon as possible may help to speed up the procedure. The results of your audit will be explained by your insurer.

Who appoints auditor of insurance company?

The members make the appointments. He will serve till the conclusion of the 6th Annual General Meeting (AGM). The appointment must be made in conformity with the auditor’s requirements.

Are insurance companies audited?

Insurance audits are conducted to confirm that you have paid the exact amount of insurance depending on your risk level—no more, no less. These audits ensure that your premium is adequate and, if not, alter it.

Business owners can choose from a variety of insurance options. Some are mandated by law, while others are optional. This is dependent on a number of criteria, including the state in which your firm is registered, the industry in which you work, and so on.

The insurance company or a third-party independent auditing firm can undertake annual insurance audits.

It’s vital to remember that any information uncovered throughout the insurance auditing process is used purely for insurance rating purposes. The data will not be shared with anybody else, including the IRS.

The auditing procedure begins with a close inspection of your firm.

To estimate insurance exposure, information from operations, records, files, and other areas is examined. The financial characteristics of your firm, such as the number of employees, payroll, sales, and units, are referred to as “exposure.”

One of the most crucial factors in the insurance auditing procedure is payroll. It contains the following items:

These figures are utilized in the audit, which determines the premium you’ll pay the next year (out-of-pocket cost of insurance).