Casualty Actuarial Society (CAS) Practice Exam

How do premium audits impact the equity and accuracy of insurance rates?

1. They primarily influence marketing strategies

2. They assist in the classification determinations

3. They eliminate the need for underwriting

4. They are not beneficial for rates

The correct answer is: They assist in the classification determinations

Premium audits play a critical role in enhancing the equity and accuracy of insurance rates by providing essential data that informs classification determinations. When insurers conduct premium audits, they review the actual exposures of a policyholder compared to the estimated exposures used in initial underwriting. This process helps ensure that insureds are paying premiums that accurately reflect their risk levels. By verifying the actual operational metrics—such as payroll for workers' compensation or sales volume for general liability—insurers can make necessary adjustments to the classifications under which the policyholders fall. Proper classification is integral to charging appropriate premiums that align with the risk each policyholder poses to the insurer. This leads to a fairer distribution of insurance costs among policyholders, as higher-risk entities pay higher premiums while lower-risk entities benefit from reduced rates. Options related to marketing strategies, eliminating the need for underwriting, and asserting that audits are not beneficial for rates do not accurately reflect the primary benefits of premium audits. These options overlook the fundamental role of audits in risk assessment and financial equity amongst policyholders.