Where your policy is written may determine how your premium is calculated. Contractors can be placed in the admitted or non-admitted Excess & Surplus Lines market. Contractors in the admitted or preferred market have their premiums calculated based on payroll. Examples of admitted markets are Acuity, Next Insurance, and Hartford.
Non-Admitted or Excess and Surplus Lines markets are for businesses that don’t fit the appetite of admitted markets due to underwriting conditions or loss history. Paper GCs (>50% subcontracted costs), roofing, steel erection, and contractors with residential tract or multi-family exposure fall within the E&S standards.
Composite Rating
Many surplus lines or E&S markets composite rate their policyholders for GL coverage. Composite rating means underwriting algorithms use a blend of payroll and gross revenue to determine final pricing. This is different from how premiums are calculated for preferred markets. The question comes up as to why gross revenue is used rather than net revenue. The answer is it provides a simpler and more standardized way to assess potential risk.
Gross Revenue reflects the total amount of work a contractor takes on. This is a key factor in determining potential liability. The higher the exposure, the higher the claim potential is for an insurance company. This is reflected in your final General Liability premium.
Key Points to Consider
Simplicity in Premium Calculation
Using gross revenue eliminates the need for insurance companies to dive into complex calculations of a contractor’s specific expenses and profit margins. These can vary significantly between businesses
Risk Assessment
Insurance companies use a contractor’s gross revenue to indicate potential claim exposure based on the volume of work they undertake regardless of profit.
Industry Standard
Most insurance companies in the contracting industry use gross revenue as the basis for premium calculation. This allows for easier comparison between companies and contractors.
Pushback
Not every contractor agrees with using gross revenue as a premium factor. While gross revenue may give insurance carriers an idea of the scale of operations, it doesn’t account for actual profit margins. Profit margins may vary significantly between contractors with similar sales volumes.
To reduce this frustration, we stress the importance of understanding the contractor profit margin formula – a tool to help your insurance bids be more accurate. This will ensure your bids bake in your overhead and job costs so your profit margins fall within your target.
Takeaways
If you are bidding on a job you will want to remember that your construction costs go beyond material and wages. You do not want to undercharge for your quality work.
If you are charging $30/hr and winning 90% of your bids, you may be eroding your net profits. You have to add in taxes, overhead costs, and insurance expenses before determining what your net profit will be. What it costs you per hour to do a job may be closer to $50/hr. In my next blog post, I’ll tackle the construction profit margin formula and explain how contractors can use it to consistently hit their profit margin target when bidding on new jobs.
Wilson Insurance Cares
Insurance can be confusing. Your experience purchasing insurance products matters to us. We are your advocates and advisors. If you have questions about your policy or the premiums you pay I want to hear about them. Reach out to me at [email protected] or at 480-964-2400 to discuss your situation.
