(October 2020)
There is no single or specific filed rating approach or formula used to develop commercial umbrella liability premiums. The American Association of Insurance Services (AAIS) has a recommended rating and pricing approach but it is not filed or mandatory. Numerous methods and techniques are available to price umbrella coverage. This article reviews the AAIS recommended approach.
There are two ways to determine the manual premium:
|
Example: Dino's Delicatessen is located in an East Coast tourist town. It operates Monday through Friday, caters to the breakfast and lunch crowd, and closes at 2:30 p.m. It also occasionally caters off-site events and delivers sack lunches to business people who participate in work-through-lunch meetings. Dino's package policy is written at standard rates, with only a package credit applied to its property and liability premiums because of its relatively small size. However, Dino uses the two full-size vans he owns extensively in the catering and delivery operations. Coverage is written with a sub-standard carrier that surcharges the rates and applies the maximum legally permitted scheduled debits. In this case, the umbrella carrier easily determines the underlying premises and operations and products/completed work manual premiums. The manual premise liability premium is $1,250, and the manual product liability premium is $3,000. However, it takes a lot more work and creativity to arrive at a fair estimate of a "manual" auto liability premium. After much analysis, the umbrella carrier arrives at a manual liability premium of $3,200 total for the two vehicles. |
This is the first step in fine-tuning the pricing. For example, a given risk's underlying premises exposure may be relatively low, and its products/completed work exposure moderate, but the commercial auto exposure is very high. These are judgment factors applied during the underwriting process that also apply to rating and pricing. There are some thoughts to consider in this step:
|
Example: Continuing with Dino's, even though the premises and operations and products/completed work exposures are reasonable, the umbrella carrier assigns a grade of low for the premises liability exposures but a medium hazard grade for products because of the possibility of food spoilage. It assigns a medium hazard grade to the auto liability exposure because of its extensive off-premises catering operations and delivery in an urban setting sometimes congested with groups of people who are not familiar with the area. |
The insurance company has a table of factors it assigns based on the coverage and hazard grades. This step is more complicated if the underlying premises and operations and products/completed work exposures are written on a Businessowners policy where these premiums may not be readily separated from the total. The factor may be applied to the entire Businessowners premium in some cases. In others, it may have to be referred to the insurance company to resolve.
|
Example: We will keep going with Dino's. This is the preliminary premium calculation up to this point.
|
|
Example: Dino's premium for the first $1,000,000 umbrella/excess liability is $1,389 based on the table above. |
These credits or debits recognize special risk characteristics that the rates do not reflect. The net credit or debit determined under this rule applies to all other rating procedures. The total credit or debit developed by applying this table cannot exceed 25%, subject to individual state regulations.
|
Example: After thoroughly reviewing the application, previous loss experience, and loss control report, the umbrella liability carrier decides not to credit or debit the risk. |
|
Example: Dino wants umbrella liability quote options for limits of $2,000,000, $3,000,000, $4,000,000, and $5,000,000. This chart outlines how that is done and the premiums for each limit if the limits factor for each layer is .50.
|
||||||||||||||||||||||||||||||
Note: The premium for each $1,000,000 is subject to a minimum premium per million that the insurance company determines.
|
Example: Dino orders Commercial Umbrella Liability Coverage with a $4,000,000 limit for a $2,606 annual premium. |
As stated in the introduction, there is no single or specific filed rating approach or formula used to develop commercial umbrella liability premiums. AAIS recommends the approach used above, but it is not filed or mandatory. As a result, any insurance company can use its own or several different approaches. Always check to determine the approach the insurance company uses.
Related Article: ISO Commercial Liability Umbrella Coverage Form Rating Considerations
Commercial umbrella liability coverage forms or policies may or may not be subject to audit. If the underlying commercial general liability premium is based on and subject to an auditable exposure such as payroll or sales, the umbrella usually is as well.