Audit Premium
The additional premium owed (or refund due) after the annual payroll audit adjusts workers comp premium based on actual versus estimated exposure.
What It Is
Audit premium is the difference between the estimated premium charged at policy inception and the final premium calculated based on actual payroll as determined by the annual premium audit. If actual payroll exceeds the estimate, the insured owes additional premium (audit premium due). If actual payroll is below the estimate, the insured receives a return premium (audit credit).
The audit premium calculation applies the same rates, experience modification rate, and premium modifiers used at inception — only the payroll basis changes. The audit is performed after the policy expires (or upon cancellation) and typically involves a physical or virtual review of payroll records, tax filings, and subcontractor payments.
Audit premiums can be substantial. A fast-growing company that underestimates payroll at inception may face an audit premium of 50-100% of the original estimated premium. Conversely, a company that overestimates payroll due to a downturn may receive a significant refund.
Why It Matters for Brokers
Unexpected audit premiums are one of the most common client complaints in commercial insurance. A $30,000 audit bill arriving six months after the policy expires creates cash flow problems and erodes trust in the broker. Brokers should set realistic payroll estimates at inception, recommend mid-term premium adjustments when payroll changes significantly, and prepare clients for the audit process. Proactive audit management is a distinguishing service that sets professional brokers apart.
Real-World Example
A staffing company estimates $2.8M in payroll at inception for a workers comp premium of $84,000. During the year, the company wins a major contract and grows payroll to $4.6M. The year-end audit produces a final premium of $138,000 — an audit premium of $54,000 due. The client is furious about the unexpected bill. Had the broker recommended a mid-term payroll adjustment when the new contract was signed, the client would have paid approximately $4,500 per month in additional premium instead of a single $54,000 bill.
Common Mistakes
- 1Setting unrealistically low payroll estimates at inception to win the account on price, creating an inevitable audit surprise.
- 2Not recommending mid-term payroll adjustments when the client's workforce grows significantly during the policy term.
- 3Failing to prepare clients for the audit process, including what records they need to maintain and when the audit will occur.
How brokerageaudit.com Handles This
Policy Checker compares estimated payroll at inception against any available mid-term payroll data to project potential audit exposure. It flags accounts where actual payroll appears to significantly exceed the estimate, prompting the broker to recommend a mid-term adjustment. Submission Intake captures detailed payroll estimates by class code and includes a quarterly payroll check-in reminder workflow to minimize audit surprises.