Purchasing insurance is a dreadful task. Not only is it money out of pocket, but many brokers and insurance carriers seem to talk in a foreign language.  In this post, we discuss three tips to help combat the confusion and ease those insurance pains. After reading, you will be ready to speak the language and understand insurance terms. This will keep you confident at the negotiating table. In addition,  the pointers will save you money and reduce unexpected financial shocks.

1. Negotiate with the RATE, not PREMIUM

Contractors are very busy and like to get right to the point. “What’s it going to cost me?”  Cost translates directly into premium.  However, the smarter question would be, “What is my rate?”

RATE

Definition The dollar amount paid for each $1,000 of REVENUE or $100 of PAYROLL.
Example With a RATE of $11.5, ABC Contractor Inc. will pay $11.50 in premium for every $1,000 of revenue.

EXPOSURE

Definition The total REVENUE or PAYROLL whose corresponding liability will be covered by the insurance carrier.
Example ABC Contractor Inc. estimates revenue at $9.5 million.

PREMIUM

Definition Total cost of an insurance policy (excluding broker or policy fees).
Example ABC Contractor’s general liability is provided by USA Insurance Inc. for a PREMIUM of $109,250.

The RATE multiplied by the EXPOSURE equals the PREMIUM: ($11.50/$1,000) X $9,500,000 = $109,250. Since EXPOSURE can fluctuate from year-to-year, PREMIUM alone is a poor metric of comparison. For instance, there’s a big difference between paying $100,000 for $5 MM of sales than for $20 MM of sales.  Using the RATE, instead of the PREMIUM, will ensure your year-to-year comparisons are accurate, regardless of revenue growth, stagnation, or reduction. (more…)