Short Answer
A premium increase doesn't necessarily mean your insurance company raised its rate by the same percentage. Professional liability premiums for architects and engineers can change based on revenue, project types, claims history, limits, deductibles, and other underwriting factors.
Some carriers also use weighted revenue to calculate exposure. This approach considers revenue from multiple years rather than relying on one annual figure. Understanding how the carrier calculates your exposure can help explain why your renewal changed.
Why did my A&E professional liability premium increase?
Your professional liability renewal comes back 15% higher than last year. You ask why, and the answer you receive is that your revenues increased.
That explanation may be accurate, but it doesn't necessarily tell the whole story. Professional liability pricing can reflect your firm's revenue, professional services, project types, claims history, policy limits, deductibles, and other underwriting considerations.
The revenue an insurer uses for its rating calculation may also differ from the figure you see on your application. Depending on the carrier's methodology, the calculation can consider multiple years of revenue or projected revenue. Weighted revenue is one way an insurer may account for those different periods.
What is weighted revenue in professional liability insurance?
Weighted revenue considers revenue from multiple periods while giving some years more importance than others. For example, an engineering firm might report projected revenue of $2,600,000 weighted at 30%, current revenue of $2,300,000 weighted at 50%, and prior-year revenue of $1,900,000 weighted at 20%.
Instead of using only $2.3 million or $2.6 million as the firm's revenue exposure, a carrier using this methodology could calculate a figure that incorporates all three periods. The example is only an illustration. Not every professional liability insurer uses weighted revenue, and carriers that consider multiple years may use different periods, percentages, and formulas.
Each carrier has its own approach to rating A&E professional liability risk. For a look at how one carrier we work with, Victor Insurance, publishes guidance on this topic, see their architects and engineers professional liability premium rating guidance.
Why would an insurer look at more than one year?
Architecture and engineering firms don't always grow at a steady pace. Consider a firm with billings of $1.6 million in Year 1, $1.9 million in Year 2, and $2.8 million in Year 3.
If an insurer looked only at the most recent year, the firm's rated exposure could change significantly from one renewal to the next. Looking at several periods can give the carrier more context about the firm's overall professional activity.
The exact methodology depends on the insurer. Weighted revenue may form part of that calculation, but the revenue shown on your application isn't necessarily the same number the carrier ultimately uses for rating.
Premium increase versus rate increase
Premium is the amount you ultimately pay for the policy. Rate is one part of the pricing calculation that helps determine that premium.
If the exposure being rated increases, your premium can rise even when the underlying rate stays the same. For example, a carrier could apply a similar rate to a larger amount of rated exposure and produce a higher premium.
Separating those two concepts can make a renewal increase easier to understand.
Revenue isn't the only factor affecting your A&E professional liability premium
Two engineering firms with $3 million in revenue shouldn't automatically expect the same professional liability premium. Their services and risk profiles may differ substantially.
An insurer may also consider professional disciplines and services, project types, gross billings, claims history, geographic exposure, policy limits, deductibles, subconsultant exposure, and contractual exposures.
A structural engineering firm's professional liability exposure may receive a different evaluation from an interior design firm's, even when both generate identical annual revenue. Each insurer determines which factors it considers and how much weight to give them.
Why your broker should ask what actually changed in your A&E professional liability premium
Knowing that last year's premium was $18,500 and this year's is $21,300 tells you the outcome. It doesn't explain what drove the change.
When a premium increases, your broker should investigate the underlying factors. Did weighted revenue increase? Did the insurer change its underlying pricing? Did an underwriting credit or debit change? Did your firm's services or project mix shift? Did your limits or deductible change? Did claims experience affect the renewal?
Answering those questions may require the broker to go back to the underwriter. The carrier can then explain which factors affected the renewal and whether the change came from exposure, pricing, underwriting adjustments, or a combination of factors.
Example
An architecture firm's prior renewal used approximately $1,850,000 in weighted revenue. At the next renewal, the figure rises to approximately $2,275,000, an increase of about 23%.
The firm's professional liability premium goes from $18,500 to $21,300, an increase of approximately 15%.
The firm might look at those numbers and assume that its insurance rate increased by 15%. That conclusion doesn't necessarily follow from the premium change.
The carrier is now rating roughly 23% more weighted revenue exposure, while the premium increased by about 15%. The underlying pricing or underwriting credits may have remained relatively stable, or they may have changed somewhat, while the larger rated exposure still produced a higher overall premium.
What to check when your weighted revenue looks unexpected
When your professional liability premium increases, ask:
- What revenue or billings figure did the carrier use for rating?
- Does the carrier use weighted revenue or another method that considers multiple years?
- Did the underlying rate change, or did the exposure change?
- Did any underwriting credits or debits change?
- Did your firm’s services or project mix shift?
- Did your limits, deductible, or coverage change?
- Can the underwriter explain the major factors behind the year-over-year increase?
The goal isn't necessarily to obtain the insurer's proprietary rating formula. It's to understand the story behind the renewal.
You may not receive every detail of the carrier's rating methodology. You can still ask your broker to identify the major factors that changed and explain how they affected your renewal.
Related Questions
If my A&E professional liability premium went up 15%, why?
This can happen when the carrier's underlying pricing or credits stay stable or improve slightly while the rated exposure grows. A larger exposure doesn't automatically produce a proportional premium increase.
Should I expect two firms with the same revenue to pay the same A&E professional liability premium?
No. Discipline, project types, claims history, geographic exposure, limits, deductibles, and contractual exposures can all affect pricing. Two firms with identical revenue can therefore receive different premiums.
Can my broker get the exact rating formula for my A&E professional liability premium?
Not always. Many carriers treat their rating methodologies as proprietary. Your broker can typically ask the carrier to explain the main factors that drove your specific renewal.
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