Premium audits adjust premiums based on which factor?

Premium audits adjust premiums based on which factor?

• A. Because losses are predictable
• B. Because the insured's credit score is a factor
• C. Because the amount of loss exposure is unknown at the start of the policy period
• D. Because audits are required by regulation

Answer: (C)

Premium audits are used because the amount of loss exposure isn’t known when the policy starts. At the outset, the insurer estimates the premium based on expected exposure—for example, payroll for workers’ compensation or gross receipts for liability policies. After the policy period ends, the actual exposure is known, and the audit calculates the final premium by applying the rate to those real figures. This ensures the premium reflects the true level of risk the insurer actually faced.

Premium audits are used because the amount of loss exposure isn’t known when the policy starts. At the outset, the insurer estimates the premium based on expected exposure—for example, payroll for workers’ compensation or gross receipts for liability policies. After the policy period ends, the actual exposure is known, and the audit calculates the final premium by applying the rate to those real figures. This ensures the premium reflects the true level of risk the insurer actually faced.