The rating metric that drives Worker's Compensation costs is payroll. This makes sense: the more employees working at a place, the higher the
payroll; this ties to the greater the exposure for somebody to file a claim.
Underestimating Payroll or Gross Revenues
Underestimating payroll or revenues for an insurance program carries some risks. Suppose a business does $1 million in sales and the general
liability is based on that rating metric. To save money the business owner tells the insurance company their sales are only $500,000. Let's say the
insurance costs $5,000 under these assumptions; you'd think the business saved $5,000. But when the audit uncovers the fact that the business
does $1 million in sales, last year's policy cost is adjusted retroactively by $5,000 to get up to $10,000 in this example. (The additional $5,000 is
due right away, because it's for last year's policy.) Further, the insurance company has seen this tactic once or twice before. In the interest of
collecting a proper amount of premium for the new year, the insurance company will also update the estimated sales for that policy year to $1
million resulting in an additional $5,000 charge. This is the double whammy scenario: the insurance company collects the retroactive premium, as
well as adjusts the current policy to reflect the reality: in this case resulting in a total $10,000 additional charge on what was budgeted as a $5,000
insurance cost. This isn't good for cash flow or for relationships between risk partners. Underwriters don’t have a great sense of humor when it
comes to mis-reported rating metrics.
We counsel our customers to be as accurate as possible or slightly underestimate projections so that audit adjustments are minimized, and
premiums are paid as revenues and payroll's are accounted for.
The Good that Comes from Audits
Not all is bad about audits. When sales come in below true expectations, most policies provide for return premiums under these circumstances.
Some surplus and excess policies do not make such allowances, however, so it is important to discuss projected revenues and payroll with your
professional agent or broker.
The audit exercise is typically a simple process of providing evidence of sales (income statement or tax reports) or payroll (941s and similar tax
forms). However, we know it isn’t something anybody wakes up in the morning looking forward to doing. Thus, occasionsionally businesses don't
get around to completing audits for their insurance company partners right away. The standard recourse is effective, but a nuisance: when an audit
is not completed they generate an "assumed audit". Here the insurance company simply assumes that your payroll or revenues increased by 50% or
more, generating a huge bill for the retroactive policy as well as a huge bill for the new policy. When an audit is not completed in a timely fashion
the insurance companies leverage is often this giant bill. This is when the accounts payable folks get over to the bookkeeper to get that audit done.
We work with our customers on expediting such events, but encourage prompt completion of any audit to avoid such unpleasantries.
In the contracting environment where a general contractor engages several types of subcontractors, the auditor will charge for costs of uninsured
subcontractors much differently from insured subcontractors. When an uninsured contractor causes a loss, the general contractor's insurance may
be responsible for covering a loss, therefore the attendant charge will be included for his policy. Certificates of insurance properly organize and
document insurance of subcontractors to reduce the effects of an audit on the general contractors insurance program.
Don't let an audit surprise you or catch you off guard. Here at EHPowerrs we try to advise you in a way that results in the best possible insurance
program while protecting your cash flow and budget. Don't hesitate to call or contact us if we can assist with achieving these common business
Why are Insurance Audits Important?
Here's why audits are important: insurance policies are rated based on many different
metrics, many of which we just do not know at the beginning of a policy term. For
example, if a rating metric for a development is the number of acres in the
development, that number won't change. If the grading metric is gross policies most
Imagine you have a business that typically generates $1 million in revenues. If you tell
your broker that your business does only a half million dollars in revenues you may get
a one year break in your insurance costs. The audit, however, is the mechanism
insurance companies use to keep you honest.
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