(April 2019)
There is no single or specific filed rating approach or formula to calculate commercial liability umbrella premium. Insurance Services Office (ISO) has a recommended approach but it is neither filed nor mandatory. Insurance carriers may use the ISO methodology or develop their own. This article reviews the approach that ISO recommends as well as some other alternatives.
Step 1. Develop the premium for each coverage provided up to its underlying limits. Include all discounts and surcharges but do not include package discounts. If the underlying premium combines liability (which is part of the umbrella) and property (which is not) in such a way that it cannot be divided, the liability portion must be calculated as a stand-alone.
Note: ISO does not explain how to calculate stand-alone premiums.
Step 2. Develop the premium described in step 1 based on the total of both the underlying and the umbrella limits. For example, if the underlying limit is $500,000 and the umbrella limit is $1,000,000, the limit used is $1,500,000.
Step 3. Subtract step 1 from step 2.
Step 4. If any coverage is subject to an underlying aggregate, multiply the result in step 3 by .98 to reflect the umbrella aggregate.
Step 5. The underwriter must determine if there is any umbrella coverage that the underlying does not provide. The underwriter must develop a premium for any additional coverage in the umbrella that is not in the underlying.
Step 6. Add steps 4 and 5 together in order to arrive at the umbrella premium.
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Example: Mario’s Pizza wants a premium quotation for a liability umbrella with a $5,000,000 limit. The underlying Commercial General Liability limit is $1,000,000, the underlying Commercial Automobile limit is $1,000,000 and the underlying Employers Liability limits are $500,000/$500,000/$500,000. Step 1. CGL premium at $1,000,000 limits = $1,200 Auto Premium at $1,000,000 limits = $3,000 Employers Liability premium at $500,000/$500,000/$500,000 limits = $300 Step 2. CGL premium at $6,000,000 limits = $1,500 Auto premium at $6,000,000 limits = $3,900 Employers Liability premium at $5,500,000/$5,500,000/$5,500,000 limits = $1,800 Step 3. Umbrella CGL premium = $300 Umbrella Auto premium = $900 Umbrella Employers Liability premium = $1,500 Step 4. CGL and Employers Liability are subject to an aggregate. As a result: Umbrella CGL premium = $300 X .98 = 294 Umbrella Auto premium = $900–no aggregate Umbrella Employers Liability premium = $1,500 X .98 = $1,470 Step 5. Underwriter determines that the worldwide exposure difference between the two forms is worth an extra $50. Step 6. $294 + $900 + $1,470 + $50 = $2,714 Liability Umbrella premium at the requested $5,000,000 limit. |
Type 1
Step 1. Develop the underlying premium for all coverages at basic limits without any discounts or surcharges.
Step 2. Multiply step 1 by company factors based on the type of risk and the severity loss potential.
Step 3. Develop additional premium for any coverage subject to the self-insured retention.
Step 4. Add steps 2 and 3 together to develop the first layer of umbrella premium.
Step 5. Compare the premium developed to the minimum premium. Apply the minimum premium if it is higher than the premium developed.
Step 6. Multiply step 4 by factors for the additional limits provided. Compare the premium developed for each layer to the minimum premium required for that layer and use the minimum premium if it is higher than the premium developed.
Step 7. Add steps 5 and 6 together to develop the final umbrella premium.
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Example: Continuing the Mario's Pizza example above: Step 1. CGL premium at basic limits and no discounts = $600 Auto Premium at basic limits and no discounts = $1,200 Employers Liability premium at basic limits = $200 Step 2. CGL premium = $600 X .23 = $138 Auto premium = $1,200 X .45 = $540 Employers Liability premium = $200 X .35 = $70 Step 3. Underwriter determines that the worldwide exposure difference between the two forms is worth an extra $50. Step 4. $138 + $540 + $70 + $50 = $798 for the first $1,000,000 layer. Step 5. Because the minimum premium is $500 per layer, the $798 premium developed is used. Step 6. 2nd layer = $798 X .85 = $678 3rd layer = $798 X .75 = $599 4th layer = $798 X .60 = $479. Use the $500 minimum premium. 5th layer = $798 X .45 = $359. Use the $500 minimum premium. Step 7. $798 + $678 + $599 + $500 + $500 = $3,075 Liability Umbrella premium at the requested $5,000,000 limit. |
Type 2
Step 1. Develop the underlying general liability premium at limits with discounts and surcharges.
Step 2. Multiply step 1 by the company factor based on the type of risk and the severity loss potential.
Step 3. Total the number of vehicles by type and multiply the number by a flat premium for each type of vehicle.
Step 4. Develop the employer’s liability premium using a payroll multiplied by the rate based on the type of risk.
Step 5. Develop the additional premium for any coverage subject to the self-insured retention based on the underwriter's judgment of the exposure.
Step 6. Add steps 2, 3, 4, and 5 together to determine the first layer liability umbrella premium.
7. Compare the premium developed to the minimum premium. Apply the minimum premium if it is higher than the premium developed.
8. Multiply step 6 by factors for additional limits provided. Compare the premium developed for each layer to the minimum premium required for that layer and use the minimum premium if it is higher than the premium developed.
9. Add steps 7 and 8 together to develop the final liability umbrella premium.
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Example: Continuing the Mario's Pizza example above: Step 1. CGL premium at $1,000,000 limits = $1,200 Step 2. Umbrella CGL Premium = $1,200 X .30 = $360 Step 3. Mario's has 2 pickup trucks and one private passenger vehicle. The charge is $150 per pickup truck and $100 per private passenger vehicle, for a liability umbrella auto premium of $400. Step 4. Umbrella Employers Liability = .31 X $150,000 payroll = $47 Step 5. Underwriter determines that the worldwide exposure difference between the two forms is worth an extra $50. Step 6. $360 + $400 + $47 + $50 = $857 for the $1,000,000 layer. The minimum premium is $500 per layer. Step 7. Because the minimum premium is $500 per layer, the $857 premium developed is used. Step 8. 2nd layer = $857 X .80 = $686 3rd layer = $857 X .70 = $600 4th layer = $857 X .60 = $514 5th layer = $857 X .50 = $429. Use the $500 minimum premium. Step 9. $857 + $686 + $600 + $514 + $500 = $3,157 for the $5,000,000 liability umbrella limit. |
Type 3
This could be a combination of Type 1 and Type 2.
Type 4
Some umbrellas are flat rated or subject to a minimum premium. In either case, the underwriter determines the premium charge based on the type of risk or according to company pricing guidelines and strategy.
Commercial liability umbrella coverage forms or policies may or may not be subject to audit. If the underlying commercial general liability premium is based on an auditable exposure, such as payroll or sales, the umbrella is usually also subject to premium audit.