What is a "premium audit" in surplus lines insurance?

A "premium audit" in surplus lines insurance refers to a review process that assesses the accuracy of premiums charged to policyholders. This audit typically occurs after a policy period has ended and involves an examination of the insured's actual exposure and loss experience compared to what was estimated at the onset of the policy. The goal is to ensure that the premiums collected are appropriate for the risk covered; this means verifying the underlying data used to set premiums, such as payroll numbers for workers' compensation or sales figures for liability insurance.

Conducting a premium audit helps both the insurer and the policyholder, as it allows for adjustments in premium charges, either upwards or downwards, based on the actual risk exposure. This process also helps maintain the financial integrity of the surplus lines market by preventing underestimation or overestimation of risk, which could lead to significant financial discrepancies over time.