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Cullinane, Shaun P. 2023. “Forecasting Audit Premiums: The Role of the Actuary.” CAS E-Forum Winter (March).
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P&C insurers who provide coverages subject to premium audit are exposed to elevated uncertainty in the amount and timing of future revenue and cash flow. Audit premiums can vary significantly from expectations when the path of the economy is uncertain or rapidly changing.

A recent survey of several commercial insurers by the CAS Reserves Working Group indicates that companies use actuaries to help forecast audit premiums. Audit premiums influence the revenue of insurance companies through the change in the Earned but Unbilled (EBUB) or Earned but Not Reported (EBNR) premium reserve. They also impact measures of claim frequency. A shift in audit premiums can be meaningful to the financial statements of P&C insurers. Despite this, to the best of the author’s knowledge, there is no actuarial literature to-date focusing on the topic.

This paper provides an overview of premium audit, presents the survey results, and highlights one approach for forecasting audit premiums. The 2020 COVID-19 recession is explored as a case study for the impact a rapidly changing economy can have on premium audits. In addition, two illustrations highlight the impact of premium audit forecasts on measures of claim frequency.

Accepted: February 23, 2023 EDT