Premium audits are performed after a policy period to reconcile the estimated premium with the premium based on actual exposure (e.g., final payroll or sales figures). The difference, if positive, represents premium that has been earned by the insurer for the completed policy period but has not yet been billed to the policyholder. This amount is referred to as "Earned but Unbilled Premium" (EBUB). Accounting principles require insurers to accrue an estimate for EBUB. Upon completion of the audit, this estimate is adjusted to the actual determined amount, and this adjustment flows through the revenue accounts.

A. Earned and billed Premiums: This is the premium already recorded based on initial estimates. The audit adjustment is for the difference between the actual earned premium and this amount.

B. Unearned but billed Premiums: This represents a liability for future coverage. The audit process concerns premium for a policy period that has already passed and is therefore earned.

D. Unearned and Unbilled Premiums: This is incorrect because the premium related to an audit adjustment is for a past policy period, meaning it has been earned, not unearned.

1. National Association of Insurance Commissioners (NAIC). Statement of Statutory Accounting Principles (SSAP) No. 53: Property and Casualty Contracts-Premiums. Paragraph 10 states, "For policies in which the premium is subject to audit, an estimate of the final earned premium shall be accrued over the term of the policy. The amount of earned but unbilled premium shall be estimated and accrued as of the reporting date. The estimate shall be adjusted when the audit is completed."

2. Pinto, J. R., & Howard, T. P. (2005). Analysis of Workers' Compensation Premium Audits. Georgia State University, Center for Risk Management and Insurance Research. Page 4 discusses how audit premiums, which are a form of earned but unbilled premium, are determined after policy expiration and result in adjustments. (Available through university research portals).

3. Casualty Actuarial Society (CAS). Foundations of Casualty Actuarial Science (4th ed.). Chapter 5, "Ratemaking," Section 5.3.2, "Premium Data." This chapter explains that for auditable policies, the final premium is determined after the policy period, and this audited premium is the basis for earned premium calculations, necessitating adjustments from initial estimates.