(April 2019)
The Insurance Services Office (ISO) formula to calculate premium for commercial general liability exposures is relatively simple and straightforward but the individual component parts require some explanation. The ISO formula is in the Commercial Lines Manual, Division Six, General Liability, Rule 35, Premium Determination.
The most time consuming and difficult part of the entire process can be determining a specific risk’s proper classification. Classifications are in the General Liability Classification Table Pages. However, General Liability Rule 25, Classifications and Rule 26, Classifications–Scope of Application contain important instructions and directions about the proper classification to use and how to use it.
Note: The Classifying Risk articles in this section may be helpful when attempting to classify a risk.
Related Article: Classifying Risk–Why Proper Classification Is Important is the first article. The others in the index follow it.
After determining the classification code in the classification table that applies, the next step is to determine the premium base. The premium base code is in the column next to the classification code in the classification table. The explanation or description of the codes is as follows:
|
Code |
Code Description |
|
a |
Per 1,000 square feet of floor area |
|
c |
Per $1,000 of total cost |
|
m |
Per $1,000 of admissions |
|
o |
Per $1,000 dollars in operating expenses |
|
p |
Per $1,000 of payroll |
|
s |
Per $1,000 of gross sales |
|
t |
See classification notes |
|
u |
Per unit |
Note: General Liability Rule 25, Classification provides the definition of each premium base symbol. General Liability Rule 24, Bases of Premium, explains what each premium base includes and excludes and how it is applied. This is very important when reviewing and using the payroll and the gross sales premium bases.
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Example: The truckers classification is unusual because, while the classification name is truckers, the actual trucking payroll is not included. Related Article: Classifying Risk–Truckers |
The loss costs that apply to a particular classification are in the state loss cost pages. The loss costs are in numerical order, first by territory and then by specific classification in that territory. The same class code is used to rate premises/operations and products/completed operations. The appropriate loss cost for each rating base or exposure must be selected.
Not every classification has loss costs. In some cases, it may be because data and statistics provided to rate making organizations are inadequate and not statistically credible. In other cases, the variances in exposures within a given classification may be too broad to determine a single loss cost that applies to all risks. 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.
The loss cost is adjusted by multiplying it by the insurance company’s loss cost multiplier factor. The loss cost multiplier factor can vary significantly by insurance carrier because of differences in carrier expenses. The differing multipliers mean that a starting rate can differ significantly by carrier even though each carrier starts with the same loss cost.
If the coverage is written on a claims-made basis, the claims-made factor is then applied. Coverage change factors can be applied to this figure for certain exclusions or limitations. Examples of coverage change situations that have rate adjustment factors are:
Rates developed in Step D. above are then multiplied by the increased limits factor. Increased limits factors are in Rule 56 in the ISO Commercial Lines Manual, Division Six, General Liability Pages. There are three increased limits factors tables for premises/operations rating and three different ones for products/completed operations rating. The Rule 56, Increased Limits Tables in the state exception pages provide the increased limits table to be used for each classification.
This is also the step in the rating process to apply any other rating modification factors that apply. The most common of these are the experience rating, schedule rating, and package modification factors.
ISO 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.
Division 9, Multiple Lines Commercial Package Policy Subdivision contains the package modification rules. The modification factors are in the state level Division 9 Loss Cost pages. However, many insurance companies file their own modification factors as exceptions.
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.
The last factor applied in this step is any deductible modification factor that applies.
Note: At the end of this step, the rate must be rounded to three decimal places. Up to this point, calculations were not to be rounded. This is the final rate used for both premium calculation and audit purposes.
The exposure unit in Step B is multiplied by the final rate determined in Step E.
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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. |
This is also the step where a transition factor for a classification that has changed rating bases is applied. Transition factors are used in situations that involve a five-year transition period where the new rating basis gradually replaces the old one. They provide a period for the insured to familiarize itself with the new arrangement and absorb additional premiums over a period of time instead of all at once. When the transition results in a higher premium, General Liability Rule 30 states the procedure to follow to minimize the premium impact to the insured and provides for a gradual premium increase. On the other hand, if the premium is reduced as a result of transition, there is no transition period and the reduction is effective immediately.
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Example: The classification code changed from a gross sales basis to a payroll basis. Because of this change, the premium for Millie’s very labor-intensive operation nearly doubled. Rule 30 was used, and the 200% increase was gradually phased in over a five-year period. |
Note: This is the last step to determine the premium.
Rule 14, Minimum Premiums 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 increased limits table that applies.
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Example: ABC Insurance Company filed the following minimum premiums:
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. |
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Example: Marilyn’s policy with Correct Classifications Insurance Company has two class codes. Code 49913 uses increased limits of 2B. Code 51250 uses increased limits of 3C. Since 3C has higher minimum premiums than 2B, the minimum premium is $300 for premises/operations and $300 for products/completed operations. The minimum premium is then multiplied by the increased limits factors that apply. |
Note: “If any” classes are not considered when determining the minimum premiums.
Other premium charges may apply. These include premium charges for additional insured endorsements and other situations where additional premiums are charged.
The premium in Step H is added to the larger premium determined in either Step F or Step G. This is the total estimated premium, subject to final audit and premium adjustment.
The premium determined in Step I is compared to the policy-writing minimum premium established by the insurance company. The larger of the two is the premiums used.