(August 2019)
INTRODUCTION
The American Association of Insurance
Services, Inc. (AAIS) Commercial Output is not rated using the standard
property rating procedure, which rates each type of property individually using
a prescribed and rigid formula. This product is rated as a whole with one rate
applying to all buildings and another rate applying to all business personal property. This approach requires the
underwriter to have sufficient information developed through applications and
loss prevention reports to assign deficiency points for the specific exposure.
The final rate for the Program is made up of
two parts. The first is the Normal Loss Basic Charge. It is the portion of the
rate that addresses minor losses. The second is the Major Loss Charge. This
portion of the rate addresses larger losses. Small losses are less than $5,000.
Large losses are more than $5,000.
Note: If the
deductible is $5,000 or more, the Normal Loss Basic Charge is not calculated.
This step applies only when the policy deductible is less than $5,000.
Add the net losses for the past three years and subtract the deductible amount used in the CURRENT rating. (What deductible applied in the prior years is irrelevant to this step.) The maximum amount of any one loss included in the calculation is $5,000. Multiply the total amount of the losses by a factor of 1.8 and divide the result by the sum of the insured values, per $100, for the past three years. The result is the Normal Loss Basic Charge.
Note: If the deductible selected applies on a per peril basis, with one or more perils having a higher deductible, or if deductibles vary by location, use the highest deductible that applies to the exposure.
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Example: Rogers Cutlery is being quoted under the COP in 2019. The losses are as follows: |
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Adjusted Losses |
Total Losses |
Maximum Loss |
Deductible |
Chargeable Losses |
|
2018 |
1 @ $7,000 |
$5,000 |
$1,000 |
$4,000 |
|
2017 |
1 @ $3,000 |
$3,000 |
$1,000 |
$2,000 |
|
2016 |
1 @ $1,500 |
$1,500 |
$1,000 |
$500 |
|
2015 |
1 @ $10,000 |
$5,000 |
$1,000 |
None - more than 3 years old |
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Total |
4 @ $21,500 |
$14,500 |
|
$6,500 |
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Total Adjusted Losses |
$6,500 X 1.8 factor = $11,700 |
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Insured Values by Year: |
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Year |
Building and Business Personal Property (BPP) Values |
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2018 |
$5,000,000 |
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2017 |
$4,800,000 |
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2016 |
$4,200,000 |
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Total |
$14,000,000 |
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Normal Loss Basic Charge |
11,700 Total Adjusted Losses ¸ $140,000 Total Values per $100 = .083 |
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A. Determine the classification group number from Classification Table A in the COP Rating Manual.
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Example: Cutlery Manufacturing is Classification Group Number 3. |
B. Using the group number from Classification Table A, find the appropriate load factor for both buildings and business personal property from the Basic Major Loss Load in Table A.
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Example: The Major Loss Load for Rogers Cutlery is .020 for
Buildings and .080 for Business Personal Property. |
The real customizing in the rating process takes place in this step. The underwriter must consider each of the categories in the following Table of Deficiency Points and assign points based on an objective evaluation of how the risk deviates from a perfect risk (not an average risk) in a particular classification. Points are assigned separately for buildings and business personal property. The points are assigned based on an overall analysis of all buildings and business personal property at all locations. Points are not assigned separately for each location.
Note: Deficiency points should not be assigned for flood, earthquake, or backup of sewers if those coverages are not provided.
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Example: Rogers Cutlery has three locations that must be evaluated by the underwriter using this worksheet. The underwriter has the application, a financial statement, and a loss prevention report for each location to aid in the evaluation. The underwriter completes the deficiency points and provides her reasoning: |
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Deficiency Item |
Points |
Buildings |
BPP |
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A. Disaster exposure–concentration of property Cutlery’s three locations are in three different states with values roughly the same at each location. |
0 to 5,000 |
0 |
0 |
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B. Climatic hazards not contemplated in the rate Two locations are in areas with significant wind exposure. |
0 to 750 |
250 |
50 |
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C. Special occupancy or production conditions—mixed occupancies, processing, traffic, fire, explosion, water damage and theft Sparking potential, some metals attractive to thieves. |
0 to 5,000 |
500 |
1,400 |
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D. Lack of private protection–sprinklers, alarms, other No theft alarms or watchperson service. |
0 to 5,000 |
200 |
1,000 |
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E. Inadequate public protection–concentration of values in poorly or unprotected areas, problems with fire department access to premises One location is unprotected, protection class 10. |
0 to 5,000 |
1,000 |
2,000 |
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F. Adjacent structures, neighborhood, other location concerns One location has a fireworks factory next door. |
0 to 750 |
750 |
750 |
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G. Construction, large values in frame buildings, condemned or dilapidated buildings, unrepaired damage, poor conditions All locations are masonry non-combustible construction and are in excellent condition. |
0 to 1,500 |
0 |
0 |
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H. Combustibility and susceptibility not usual to the industry, unusual packaging, highly damageable goods beyond the norm. No unusual exposures for a cutlery manufacturing operation. |
0 to 1,500 |
0 |
0 |
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I. Extending coverage to excluded perils or specific insurance on normally excluded property Pollutant Cleanup limit increased to $100,000. |
0 to 1,500 |
1,000 |
0 |
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J. Transit, floating equipment exposures greater than contemplated for the industry, subrogation restrictions on goods in transit or bailment |
0 to 5,000 |
0 |
0 |
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K. Flood potential based on location Flood coverage applies at all locations but only one is in an area prone to flooding. |
0 to 5,000 |
1,000 |
200 |
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L. Earthquake and volcanic action exposure Earthquake coverage applies at all locations, but all are in areas with low earthquake potential. |
0 to 5,000 |
750 |
750 |
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M. Lower deductibles on select properties/perils All deductibles are $1,000 or higher. |
0 to 1,000 |
0 |
0 |
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N. Extension of coverage to coverages not anticipated in class There are no extra extensions of coverage. |
0 to 1,000 |
0 |
0 |
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Total Points |
0 to 43,000 |
5,450 |
6,150 |
Some insurance companies develop grids or charts to assign a more narrowly defined range of points for specifically defined hazards or exposures. For example, an individual insurance company may assign anywhere from 1,000 to 1,500 deficiency points for a non-sprinklered frame building and from 700 to 1,200 deficiency points for a non-sprinklered masonry non-combustible building. A building situated on a known earthquake fault line may be assigned all 5,000 deficiency points if it is the only location but only 500 if its values represent less than 5% of the total value of all property locations, none of the others being in an earthquake zone. Assigning deficiency points must reflect the facts and characteristics of the risk but also recognize the opportunity for sales and profitability as well.
Other insurers will require the underwriter to consider the traditional rating approach and then apply factors that address the broader coverages provided by the COP.
The total buildings and business personal property deficiency points developed in Step 3 are converted to a building and business personal property deficiency point charge using Table B. This table assigns the charge based on the range where the deficiency points fall.
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Example: From the Rogers Cutlery deficiency points determined above: |
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Type of Property |
Deficiency points |
Deficiency point range |
Charge |
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Building |
5,450 |
5,401–5,450 |
.620 |
|
BPP |
6,150 |
6,101–6,200 |
.862 |
Add the Major Loss Load determined in Step 2 to the Deficiency Point Charge determined in Step 4 to arrive at the major loss load.
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Example: From the Rogers Cutlery deficiency points and major loss load determined above: |
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Deficiency Point Charge from Step 4 + |
Basic Major Loss Load From Step 2 = |
Major Loss Load |
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Buildings: 620+ |
.020 = |
.64 |
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BPP: .862 + |
.080 = |
.942 |
Add the Normal Loss Basic Charge to the Major Loss Load to determine the COP Factor.
Note: If the deductible is $5,000 or higher, the normal loss basic charge is zero.
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Example: |
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Coverage |
Normal Loss Basic Charge + |
Major Loss Load = |
COP Factor |
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Building |
.083 |
.640 |
.723 |
|
BPP |
.083 |
.942 |
1.025 |
Multiply the policy limit (per $100) by the COP Factor from Step 6 to determine the COP premium.
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Example: |
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Coverage |
COP Factor x |
Limit of Insurance = |
Premium |
|
Building |
.723 |
$5,000,000 = |
$36,150 |
|
BPP |
1.025 |
$3,000,000 = |
$30,750 |
Most endorsements have their own specific and separate rating. Refer to the rating instructions for specific endorsements in the COP Rating Manual. Some endorsements that provide additional perils or coverage, such as earthquake and flood, are not rated separately but are charged for by assigning higher deficiency points to recognize the additional exposure created by adding the peril or coverage.