What is the purpose of a "premium audit"?

The purpose of a "premium audit" is to examine the insured's operations and records to ensure that the premium charged for an insurance policy accurately reflects the risk and exposure associated with the business. This process is crucial because insurance premiums are often calculated based on estimated figures, such as estimated sales, payroll, or other relevant metrics at the time of policy issuance.

During a premium audit, the insurer will review financial records and operational data from the insured business to verify these estimates. For instance, if a business had underestimated its payroll or business revenue, the audit may lead to an adjustment in the premium to reflect the true risk associated with the policy. This ensures fairness in the pricing of the insurance coverage, protects the insurer from underpricing risks, and ensures that the insured is paying a fair amount relative to their actual exposure.

Other options in the question focus on different aspects of insurance operations. For example, checking for policyholder compliance with underwriting rules pertains to underwriting processes rather than premium determination. Assessing an insurance agent's effectiveness relates to the sales aspect of insurance rather than the premium calculations. Lastly, reviewing claims for potential fraud is concerned with claims management and fraud detection rather than the calculation of premiums.