AAIS COMMERCIAL LIABILITY COVERAGE RATING CONSIDERATIONS

(December, 2018)

INTRODUCTION

An explanation of the American Associations of Insurance Services (AAIS) formula for calculating commercial liability exposures exists in the Commercial Liability Program Countrywide Manual, Rule 7, Premium Development.

A. CLASSIFICATIONS

The most challenging part of the entire process is determining the proper classification for a given risk. Classifications are in the Commercial Liability Program Classification Table Pages. However, Rule 6, Risk Classification and the Classifications Instruction must be reviewed to determine how to properly categorize the various exposures.

Classify based on the operations. If the risk has more than one operation, it may be necessary to use more than one classification. If it appears that a given operation does not have a classification that fits, it should be referred to the insurance company for proper classification. The same classification must be used to rate both the premises/operations and the products/completed operations exposures.
Classification Notes must be read thoroughly to completely understand how to use the classification. If notes are at odds with any other rule, the notes apply.
Seventeen different operations (such as parking areas) are not rated separately when they are part of another operation. These are known as inclusions.
Ten operations are always rated separately, even though they may seem to be included in the main classification. Exceptions may occur within the classification notes.

B. EXPOSURE BASE

After the classification code in the classification table is determined, the next step is to determine the rating base. The rating base symbol is in the column next to the classification code in the classification table. The explanation or description of the codes is as follows:

Symbol	Exposure Base	Symbol	Exposure Base
A	Per 1,000 Square Feet of Area	LC	Per Location
AC	Per Acre	LD	Per Location/Per Day
AD	Per 1,000 Admitted	LS	Per Lessee
AN	Per Animal	M	Per Member
AT	Per Attendant	MDS	Per 100 Man Days
B	Per 1,000 Bales	MI	Per Mile
C	Per Contestant	O	Per $1,000 of Expense
CDS	Per Camper Day	P	Per $1,000 of Payroll
CVD	Per Convention Day	PDS	Per 1,000 Passenger Days
DA	Per Activity Day	PR	Per Person
E	Each Unit	PU	Per Pupil
EX	Per Exhibition	R	Per $1,000 of Receipts
F	Per Farm	RE	Per Registrant
FC	Flat Charge	S	Per $1,000 of Sales
FM	Per Faculty Member	SC	Per Scout
FR	Per Linear Foot	SH	Each Show
FU	Per Family Unit	TC	Per $1,000 of Total Cost
G	Per Game	TM	Per Team
GN	Per 1,000 Gallons	U	Per Unit
K	Per Kennel	V	Per 1,000 Vehicles

Note: Rule 7. Premium Development explains what to include in each premium base as well as what to exclude. This is particularly important when reviewing and using the payroll and the gross sales premium bases.

C. BASIC LIMITS RATES (LOSS COSTS)

The loss costs that apply to a particular classification are in the state loss cost pages. The loss costs are in class code numerical order. Premises/operations loss costs vary by territory, but the products/completed work loss cost is the same throughout a state. The same class code is used to rate both premises/operations and products/completed work. The appropriate loss cost for each rating base or exposure must be selected.

Loss costs are not provided for every classification because insufficient rate making data exists. In other cases, the variances in exposures within a particular classification are too broad to determine a single, applicable loss cost. In these cases, the symbol (a) appears in the loss cost table. Classifications that have this symbol instead of a specific loss cost are referred to the insurance company to determine the loss cost or rate. Each insurance company develops its own judgment loss cost and/or final rate after it evaluates the specific risk's exposures.

D. LOSS COST TO RATE

The loss cost must be converted to a rate. Each company must develop and file its own loss cost multiplier factor and multiply that factor times the loss cost to compute a starting rate.

This rate can then be adjusted by coverage change factors for certain exclusions or limitations. Examples of coverage change situations that have rate adjustment factors are:

Personal And Advertising Injury Exclusion
Fire Damage Liability Exclusion
Medical Payments Exclusion

E. INCREASED LIMITS ADJUSTMENTS

Rates developed in Step D. above are then multiplied by the increased limits factor. Increased limits factors are in Countrywide Rating Information in the Commercial Liability Countrywide Manual. There are three increased limits factors tables for premises/operations rating and three different ones for products/completed operations rating. The increased limits table to be used is determined by class and is listed with the loss costs.

F. EXPERIENCE AND SCHEDULE RATING

This is also the step in the rating process where any other applicable rating modification factors are applied. The most common of these are the experience rating and schedule rating factors.

AAIS provides the rules that govern the experience and schedule rating plans. However, many insurance companies develop and apply their own factors and rating criteria to the calculations. These factors and rating criteria must be applied on a consistent and non-discriminatory basis.

Many insurance companies also file their own Individual Risk Premium Modification (IRPM) Plans, Supplemental Rating Plans (SRP), and other related or similar rating adjustment plans. The factor from one of these plans is usually applied at this step in the process. In most states, using both Schedule Rating and IRPM/SRP plans is not allowed because each uses the same judgment considerations.

G. DEDUCTIBLE

The last factor applied in this step is any applicable deductible modification factor.

Note: At the end of this step, the rate must be rounded to three decimal places. Up to this point, any loss cost/rate calculations are not rounded. This is the final rate used for both premium calculation and audit purposes.

H. EXPOSURE UNITS

The exposure unit outlined in step B above is multiplied by the final rate determined in Step E above.

Example: The rate is 1.00, the premium basis is payroll (p) and the actual payroll is $100,000. The premium calculation is 1.00 X 100 = $100 because the payroll rating base applies to each $1,000 of payroll.

Note: This is the last step to determine the premium.

I. MINIMUM PREMIUMS

Rule 7 states how to determine the minimum premium that applies to a specific risk. Minimum premiums apply separately to premises/operations and products/completed operations. The insurance company provides the base minimum premium, based on the applicable increased limits table.

Example: ABC Insurance Company filed the following minimum premiums:
Increased Limit Table	Minimum Premium
1	$100
2	$200
3	$300
A	$100
B	$200
C	$300
These minimum premiums are applied only once for each policy and policy period. If there is more than one classification code, only the highest applicable minimum premium is used.

Example: Marilyn’s policy with Correct Classifications Insurance Company has two class codes. Code 62010 uses increased limits of 3B. Code 39445 uses increased limits of 2A. Because 3B has higher minimum premiums than 2A, the minimum premium is $300 for premises/operations and $200 for products/completed operations. The minimum premium is then multiplied by the increased limits factors that apply.

Note: The procedure to determine minimum premiums does not apply to "if any" classifications.

J. ADDITIONAL PREMIUMS

Other premium charges may apply. These include premium charges for additional insured endorsements and other situations for which additional premiums are charged.

K. TOTAL POLICY PREMIUM

The premium in Step J above is added to the larger premium determined in either Step H or Step I. This is the total estimated premium, subject to final audit and premium adjustment.

L. FINAL PREMIUM

The premium determined in Step K above is compared to the policy-writing minimum premium that the insurance company determines. The larger of the two is the premium used.