(December 2019)
The rating for the Insurance Services Office (ISO) OP 00 01–Capital Assets Program Coverage Form (Output Policy) is more similar to Inland Marine Rating than Property Rating. Each risk must be carefully considered, and points assigned based on underwriting judgment. The standard ISO Property rating approach is not used although the underwriter may use it as a point of reference.
The final rate is made up of two parts. The first is the Normal Rate, sometimes referred to as the small loss rate. It is the portion of the rate that addresses minor losses. The second is the Major Rate. This portion of the rate addresses larger losses. Small losses are less than $5,000. Large losses are more than $5,000.
Note: The Normal Rate is not calculated if the deductible is $5,000 or more.
This is an experience rating technique similar to the one used with liability coverage rating. It caps large losses at a certain amount but uses the full value of smaller losses. Numerous smaller losses have more impact than a single large loss. The Normal Rate is determined as follows:
Step 1. List the gross amount of each individual loss for at least the past three years.
Note: Additional years' experience can also be used. Loss amounts are gross and are not reduced by applying any deductible.
Step 2. Cap each loss at $5,000.
Note: A $7,000 loss is capped at $5,000. With a $3,000 loss, the entire $3,000 is used.
Step 3. Subtract the deductible to be used for the policy term being calculated from each capped loss to determine the Net Normal Losses.
Step 4. Total the Net Normal Losses.
Step 5. Multiply step 4. by 1.10.
Note: This is the total adjusted loss.
Step 6. Total the Building and Business Personal Property values for the same time periods as the losses that were gathered. Use five years of Building and Business Personal Property values if five years of losses are used.
Step 7. Divide step 5. by step 6.
Step 8. Multiply step 7. by the insurance company Loss Cost Multiplier to arrive at the Normal Rate.
Step 9. Compare Step 8. to the maximum and minimum
normal rate range. If it is below the range, increase it to the minimum. If it
is above the range, reduce it to the maximum.
Note: Each
insurance company develops its own range starting with the normal loss cost range
provided in Table 101 A. 1. f. (LC) in the loss cost pages. The loss cost is
multiplied by the insurance company’s Loss Cost Multiplier.
Note: The Normal Rate is zero if the deductible for the renewal period is $5,000 or more.
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Example: Gelding, Inc. has the following loss and value information. |
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|
Loss Date |
Loss Amount |
Maximum Loss (capped
at $5,000) |
Deductible |
Chargeable Loss |
|
2018 |
$7,000 |
$5,000 |
$1,000 |
$4,000 |
|
2017 |
$3,000 |
$3,000 |
$1,000 |
$2,000 |
|
2016 |
$1,500 |
$1,500 |
$1,000 |
$500 |
|
2015 |
$10,000 |
$5,000 |
$1,000 |
$4,000 |
|
Total |
$21,500 |
|
|
$10,500 |
Total Adjusted Losses: $10,500 X 1.1 = $11,550
|
Insured Values
by Year |
|
|
Year |
Building and
Business Personal Property Values |
|
2018 |
$5,000,000 |
|
2017 |
$4,800,000 |
|
2016 |
$4,200,000 |
|
2015 |
$4,000,000 |
|
Total |
$18,000,000 |
$11,550 ¸$180,000 = .064
.064 X 1.80 (Company A loss cost) = .115
The loss cost range is .05 to 1.00. When Company A applies its loss cost, the range is .09 to 1.80. Because .115 is in the range, it is not changed, and the final Normal Rate is .115.
The Major Rate is made up of two distinct parts. The first is the Initial Major Rate and is based on the classification number that applies to the risk's primary operation. The second is the Deficiency Point loss cost and is based on the risk's individual characteristics.
The ISO Capital Assets Program Coverage Form (Output Policy) Classification Table consists of 13 pages of eligible operations and occupancies. A classification must be selected, and a group number assigned to the overall operation. In cases of two or more operations, the one that best represents the overall operation is selected.
The Initial Major Loss Cost table is in Table 101 B. 2. in the Loss Cost pages. The group number in the classification table is used. The Initial Major loss costs for buildings and business personal property is then selected. The loss cost is converted to a rate by multiplying it by the insurance company Loss Cost Multiplier.
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Example: Gelding, Inc. is involved in many activities, but its primary operation is an Analytical Chemist. This is Group 7 according to the Classification Table. The Group 7 Initial Building Loss Cost is .046 and the Initial Business Personal Property Loss Cost is .182. Company A's lost cost multiplier is 1.80. The Initial Major Building Rate is .046 X 1.80 = .083. The Initial Major Business Personal Property Rate is .182 X 1.80 = .328. |
The Deficiency Point Characteristics Schedule has 15 categories. Each must be considered separately. Deficiency points are assigned based on a given risk's variance from perfection, not from average. Deficiency points are assigned separately for Buildings and Business Personal Property.
Note: Only one rate applies to the entire operation. As a result, when Deficiency Points are assigned based on the entire operation, it is based on a total risk analysis instead of an analysis on a building-by-building basis.
|
Category |
Deficiency Point Characteristic |
Deficiency Point Range |
|
A |
Disaster exposure: Concentration of large values is important. An operation with nationwide exposures receives fewer points. Single location operations receive more points. |
0–5,000 |
|
B |
Climatic hazards: Perfect risks are not in areas with hurricanes, tornadoes, or wildfires. More points are assigned based on the number and type of natural disasters insured. |
0–1,000 |
|
C |
Special Occupancy Hazards: Consider multiple occupancies, processing activities, storage issues, traffic, and exposures to major losses, such as fire, explosion, theft, and water damage. |
0–5,000 |
|
D |
Lack of Private Protection: The perfect risk has sprinkler systems, fire and theft alarms, and even watchperson service. Extinguishing systems are in place and maintained regularly. |
0–5,000 |
|
E |
Inadequate public protection: The perfect risk is in public protection class 1. More points are assigned as public protection decreases. Consider the number and value of buildings in each protection class. |
0–5,000 |
|
F |
External Exposures: What buildings or operations are adjacent to the insured's locations? Is clear space adequate or are they very close and expose the insured's location? |
0–1,000 |
|
G |
Construction and values issues: Are values in well-built buildings or concentrated in buildings of inferior quality or that have major shortfalls and deficiencies? |
0–2,000 |
|
H |
Combustibility/Susceptibility: Evaluate personal property exposures and features not usually considered with the classification. |
0–1,500 |
|
I |
Specific insurance arrangements: Are some Additional Coverages' automatic limits increased or are other coverages added? |
0–5,000 |
|
J |
Transit: Are exposures to floating equipment greater than contemplated by the classification? Are there any subrogation restrictions on goods in transit or bailment? |
0–5,000 |
|
K |
Flood: If flood coverage is provided, does the risk have exposures in known flood zones? |
0–2,500 |
|
L |
Earthquake: If earthquake coverage is provided, does the risk have exposures in areas known to be prone to earthquakes? |
0–2,500 |
|
M |
Different deductibles: Are any deductibles lower than standard for certain property or locations? |
0–1,000 |
|
N |
Coverages: Are any coverages deleted that are usually provided? |
–1,900–0 |
|
O |
Equipment Breakdown: Is CP 04 13–Equipment Breakdown Coverage to be included? |
0-2,500 |
After point totals are assigned, they are added together to develop a Deficiency Point total for both Buildings and Business Personal Property. Table 101 B. 4. in the Loss Cost pages is used to convert them to a loss cost. A loss cost within the range for Building and Business Personal Property is selected. The loss cost selected is then multiplied by the insurance company loss cost multiplier to develop the Deficiency Point rate.
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Example: After careful evaluation, deficiency points for Gelding, Inc. are assigned as follows: |
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|
Category |
Building Points |
Business Personal
Property Points |
|
A. |
500 |
750 |
|
B. |
150 |
500 |
|
C. |
50 |
1,500 |
|
D. |
250 |
750 |
|
E. |
250 |
1,000 |
|
F. |
0 |
0 |
|
G. |
500 |
500 |
|
H. |
0 |
750 |
|
I. |
0 |
0 |
|
J. |
0 |
0 |
|
K. |
0 |
0 |
|
L. |
0 |
0 |
|
M. |
0 |
0 |
|
N. |
0 |
0 |
|
Total Points |
1,700 |
5,750 |
The Building Points Range is 1,601-1,900 and the loss cost range is .031 through .040. The underwriter selects .033 and multiplies it by the insurance company’s 1.80 Loss Cost Multiplier for a Building Deficiency Point Rate of .059.
The Business Personal Property Range is 5,701-5,800 and the loss cost range is .393 through .414. The underwriter selects .403 and multiplies it by the insurance company’s 1.80 Loss Cost Multiplier for a Business Personal Property Deficiency Point Rate of .725.
Add the Initial Major Rate to the Deficiency Points Rate to obtain the Major Rate. There is one Major Rate for Building and one Major Rate for Business Personal Property.
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Example: The Gelding Initial Building Major Rate is .083 and the Deficiency Points Rate is .059. The Building Major Rate is .083 + .059 = .142. The Gelding Initial Personal Property Major Rate is .328 and the Deficiency Points Rate is .725. The Business Personal Property Major Rate is .328 + .725 = 1.053. |
The Normal Rate is added to the Building Major Rate to determine the final Building Rate. The Normal Rate is added to the Business Personal Property Major Rate to obtain the Final Business Personal Property Rate.
When the deductible is more than $5,000, the Final Rate is modified by the large Deductible Credit factor in the applicable table in the Rating Relativities and Factors pages in the Capital Assets Program Rules section.
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Example: Gelding, Inc.’s Normal Loss rate calculated above is .115. This means the Building Final Rate is .115 + .142 = .257 and the Business Personal Property Final Rate is .115 + 1.053 = 1.168. |
The Total Building Values per $100 of value are multiplied by the Building Final Rate to develop the Building premium. The Total Business Personal Property Values per $100 of value are multiplied by the Business Personal Property Final Rate to develop the Business Personal Property premium. The property premium is the total of the two.
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Example: Gelding, Inc.'s building value is $2,000,000 and its Business Personal Property values are $3,500,000. The premium is calculated as follows: |
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|
Coverage |
Limit |
Rate |
Premium |
|
Building |
$2,000,000 |
.257 |
$5,410 |
|
Business Personal Property |
$3,500,000 |
1.168 |
$40,880 |
|
Total Property Premium |
|
|
$46,290 |
All premium changes due to broadening or restricting coverage provided by endorsements are made by adjusting the Deficiency Points, except for Business Income and Extra Expense Coverage and Automatic Increase Coverage.
The Business Income and Extra Expense Coverage Rate is determined by multiplying the Business Income Factor in Table 38 C. 5. a. (RF) on the Rating Relativities and Factor page by the final Building Rate. The premium is determined by multiplying the Business Income and Extra Expense limit of insurance by the Business Income Rate.
Automatic Increase Coverage is charged based on the amount of increase. The standard increase is 2%. If a higher percentage on either Building or Business Personal Property is desired, the premium is multiplied by the factor in Table 28 C. 4. (RF) in the Rating Relativities and Factors Pages.