Return Premium
A refund of premium owed to the insured when the payroll audit shows actual exposure was lower than estimated, or when a policy is canceled mid-term.
What It Is
Return premium is a refund of premium owed to the insured when the actual exposure (payroll) is determined to be less than the estimated exposure used to calculate the initial premium. Return premiums most commonly arise from the annual payroll audit but can also result from mid-term policy cancellation, removal of coverage, or correction of rating errors.
In the audit context, if the insured estimated $1.2M in payroll at inception but actual payroll was only $900,000, the premium difference based on the $300,000 payroll reduction is returned to the insured. The return premium calculation uses the same rates and modifiers applied at inception.
Return premiums from mid-term cancellations may be calculated on a pro-rata basis (proportional to the time remaining) or a short-rate basis (proportional but with a penalty for early cancellation), depending on the policy terms and reason for cancellation. Minimum earned premium provisions may also limit the amount of return premium available.
Why It Matters for Brokers
Return premiums represent money owed to the client, and brokers should proactively ensure their clients receive refunds promptly. Delays in processing return premiums erode client trust and create the perception that the broker is not actively managing the account. Brokers should monitor audit results and mid-term changes for return premium situations and follow up with carriers to ensure refunds are processed in a timely manner.
Real-World Example
A restaurant group with three locations estimated $1.6M in annual payroll for a workers comp premium of $28,800. During the year, the group closed one location and reduced staffing, bringing actual payroll to $1.1M. The audit produces a return premium of $9,900. The carrier processes the refund within 45 days. The broker proactively notifies the client of the expected refund amount before the audit is finalized, sets expectations on timing, and follows up with the carrier to ensure prompt payment.
Common Mistakes
- 1Not following up with the carrier on return premium processing, allowing refunds to be delayed for months.
- 2Failing to notify the client of expected return premiums from audits, missing an opportunity to demonstrate proactive account management.
- 3Not understanding the difference between pro-rata and short-rate cancellation refund calculations, leading to incorrect client expectations about the refund amount.
How brokerageaudit.com Handles This
Policy Checker tracks premium estimates versus actual exposure data to project potential return premiums before the audit is finalized. It monitors carrier audit reports and flags return premiums that have not been processed within 60 days. Submission Intake includes accurate payroll projections that minimize the likelihood of significant over-estimation, reducing the frequency of large return premium situations.