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🔄 '''Adjustment premium''' is an additional or return [[Definition:Premium | premium]] charged or credited after a policy's inception to reflect the difference between the initially estimated exposure and the actual exposure that materialized during the [[Definition:Policy period | policy period]]. This mechanism is fundamental to lines of insurance where the risk base is not fixed at inception — such as [[Definition:Workers' compensation insurance | workers' compensation]], [[Definition:General liability insurance | general liability]], and [[Definition:Marine cargo insurance | marine cargo]] policies rated on variables like payroll, revenue, or shipment values that fluctuate over time. Rather than forcing both parties to guess at the final premium when the policy is bound, the adjustment premium mechanism allows the [[Definition:Insurance carrier | insurer]] and [[Definition:Policyholder | policyholder]] to settle on an accurate premium once actual figures are known.

📐 The process typically begins when the insurer issues the policy with a [[Definition:Deposit premium | deposit premium]] — an estimated premium based on projected exposure data supplied by the insured. At the end of the policy period (or at agreed interim intervals), the insurer conducts a [[Definition:Premium audit | premium audit]], reviewing the policyholder's actual payroll records, sales figures, or other rating bases. If the actual exposure exceeds the original estimate, an additional adjustment premium is due from the insured; if actual exposure fell short, the insurer issues a return premium. The [[Definition:Binding authority agreement | policy terms]] will specify the audit methodology, timing, and any minimum or maximum premium provisions that cap how much the final premium can deviate from the deposit. In some [[Definition:Reinsurance | reinsurance]] arrangements — particularly [[Definition:Excess of loss reinsurance | excess of loss treaties]] priced on estimated [[Definition:Subject premium | subject premium income]] — a similar adjustment process occurs, with the [[Definition:Cedant | cedant]] reporting actual premiums to the reinsurer for final rate application.

💡 Adjustment premiums matter because they align the cost of insurance with the actual risk transferred, preserving pricing fairness for both the insurer and the insured. For policyholders — especially businesses experiencing rapid growth or seasonal volatility — an adjustable premium structure avoids the burden of overpaying upfront based on conservative estimates, while still ensuring the insurer collects adequate [[Definition:Premium | premium]] commensurate with the exposure it actually bore. From the insurer's perspective, the adjustment mechanism protects against [[Definition:Underpricing | underpricing]] risk when a policyholder's operations expand beyond initial projections. Getting this process right is also an operational challenge: timely and accurate [[Definition:Premium audit | premium audits]] require coordination between the insurer's audit team, the policyholder's finance department, and often a [[Definition:Insurance broker | broker]] acting as intermediary. Disputes over audit findings are not uncommon, making clear policy language and transparent audit procedures essential to maintaining the commercial relationship.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Deposit premium]]
* [[Definition:Premium audit]]
* [[Definition:Earned premium]]
* [[Definition:Minimum and deposit premium]]
* [[Definition:Subject premium]]
* [[Definition:Return premium]]
{{Div col end}}

Definition:Adjustment premium - Revision history

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