(June 2022)
Rating condominium association coverage depends on the condominium’s occupancy and use. Rating condominium commercial unit-owner’s coverage is based entirely on the insured unit’s occupancy. Every coverage and cause of loss is rated separately. The most exacting part is determining the correct fire rate because it is unique and risk-specific. All other causes of loss are rated using a "one-size-fits-all" approach. Three primary rating approaches are used in fire rating:
After evaluating fire, this article considers developing a premium for all covered causes of loss using the rate and value approach. However, before beginning to analyze fire, it is important to review the concept of loss costs and individual company expense factors.
Rating advisory boards and bureaus developed and filed rates on behalf of their member companies many years ago. These rates were developed in two steps. In the first, the rating board or bureau collected large quantities of credible loss and statistical information from its member companies, such as losses, construction data, details of different occupancies, and public protection class. They then used this data to develop loss costs for various classes of business. At this point, the second step came into play. It was based on aggregate data on its members’ reported expenses, contingencies, and profits. Combining the two factors resulted in a final rate.
At the present time, final rates as determined in the past are not published. The Insurance Services Office (ISO) provides only the first factor, the loss cost. The individual insurance company must then multiply that loss cost by its own expense modification factor to develop the final rate. This approach encourages competition because each company must control its own expenses for its loss cost multiplier to be competitive.
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Example: Three insurance companies quote on this risk, based on a .60 loss cost factor for masonry noncombustible condominiums. |
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Company |
Loss Cost Multiplier |
Rate |
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A |
1.40 |
.84 (.6 X 1.40) |
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B |
1.80 |
1.08 (.6 X 1.80) |
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C |
2.10 |
1.26 (.6 X 2.10) |
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Company A has a pricing advantage because of its lower expenses (expressed as a lower loss cost multiplier). |
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CLASS RATING
The class rating procedure in the ISO Commercial Lines Manual (CLM) provides a uniform and standard way to develop rates for small commercial buildings and habitational risks not eligible for dwelling rating programs. The Basic Group I class rated loss cost approach applies to habitational risks, hotels, motels, mercantile, warehouse, and non-manufacturing classes, as well as to a few specific manufacturing classes. Special class loss costs apply to all property in the open and to other special property. ISO Commercial Risk Services, Inc. (CRS) does not inspect or provide specific loss costs for properties eligible for class rating.
General
The Class Rate section of the CLM applies a simplified rating approach for property coverages on eligible commercial and habitational risks. The procedure is based on building construction and the type of occupancy. The loss costs that the Basic Group I Class Rate section of the manual provides are the 80% coinsurance loss costs per $100 of insurance value or limit. An additional factor to reflect the public protection class at risk must be applied to the loss cost, and this section also includes those factors.
Rules and forms contained in the rate section for each state apply to those classes or risks eligible for class rating. Protection class and territorial multipliers that apply to Basic Group I loss costs are in the state exception pages.
Risks eligible for class rating are not subject to inspection by either ISO or CRS to establish rates or determine eligibility.
Types
of Construction
The types of construction are described in Rule 15 of the CLM. Six types of construction are used in class rating:
This construction has exterior walls of wood or other combustible materials. Frame also includes mixed construction, such as brick veneer, stone veneer, wood-iron clad, or stucco on wood. Floors and roof materials are also combustible.
This construction has exterior walls constructed of masonry materials, such as adobe, brick, concrete, gypsum block, hollow concrete block, stone, and tile. Floors and roof materials are combustible.
This construction has exterior walls, floors, and roof constructed of (and supported by) metal, asbestos, gypsum, or other noncombustible materials.
Note: These three types of construction are sometimes referred to as inferior
construction because they have limited ability to contain a fire.
This construction has exterior walls constructed of masonry materials as described under the joisted masonry category above. The difference is that the floors and roof construction is metal or any of a number of other noncombustible materials.
This construction has exterior walls, floors, and roof constructed of masonry or fire resistive materials with a fire resistance rating of at least one hour (but less than two hours).
This construction has exterior walls, floors, and roof constructed of masonry or fire resistive materials that have a fire resistance rating of more than two hours.
Eligible
Risks
The following types of buildings and occupancies are eligible for Basic Group I class loss costs:
The following buildings or occupancies are not eligible for Basic Group I class loss costs:
The general class rates contemplate properties in average condition. Because some otherwise acceptable properties may not meet that standard, surcharges are available to apply to them. A loss cost surcharge is applied to the general class loss cost if any of the following conditions are present:
CSP class codes are listed in the ISO Commercial Statistical Plan (CSP) manual. They are also in the Division Five Fire and Allied Lines Classification Table pages by type of occupancy. In some cases, the building CSP class code is different from business personal property. However, the loss cost is based on the building class code, not the business personal property class code.
The following criteria determine the CSP class code that applies to building:
Determine the appropriate building and personal property Basic Group I loss cost from the class loss costs in the state loss cost pages of the Commercial Property manual. It is important to note that the class code rate is based on the building class even when only personal property is rated. The personal property CSP is used only to determine if loss cost grouping A, B, or C should be selected.
These are listed by type of construction for each CSP class code. When loss costs listed do not reflect a public protection class, the public protection class multipliers listed on the state protection class and territorial multiplier page are applied.
Certain exceptions may apply. The rules for class rates under Rule 85 must be reviewed to determine if they do.
For auxiliary and secondary buildings, the CSP class code loss costs for the occupancy's CSP class code loss cost are applied.
Some classes are neither eligible for class rates nor specifically rated. These are called Special Class Loss Costs and are listed in the Countrywide Loss Costs under Rule 85. Examples of Special Class Rate properties are property in the open, bridges, signs, and many other auxiliary buildings and structures.
SPECIFIC RATING
ISO (or the appropriate rating organization that has jurisdiction) must inspect risks not eligible for class rates and publish a specific rate or loss cost. Risks that qualify for this treatment are those that fall outside the class rating criteria for reasons such as:
ISO inspects risks that are not eligible for class rates. It uses a survey to calculate a specific loss cost for the property inspected. The specific loss cost is based on the rating schedule ISO establishes and uses. The risk sends one of two application forms to ISO to request that it publish the specific loss cost for a building or structure.
This ISO application is used to request that ISO assign codes or develop specific loss costs for specific properties.
This ISO application is used to request publishing tentative or estimated codes and loss costs for a specific property under construction. Final codes and loss costs cannot be developed until construction is complete and the occupancy established.
Note: The named insured can obtain copies of ISO's rating survey. It can be used to highlight deficiencies and to work with the named insured to reduce its loss costs. In addition, simple changes made during construction can add up to considerable savings later.
FACTORS,
ADJUSTMENTS, AND MULTIPLIERS
Territorial
Multipliers
Territorial multipliers are used with only class rated risks. They reflect the differences in loss costs based on locations within a state. These multipliers are in the state loss costs pages.
Causes
of Loss Adjustments
The rate can be reduced if causes of loss that are part of the Group I rate are excluded. This reduction is a rate credit, not a premium credit.
Coinsurance
Loss costs are based on 80% coinsurance. A credit is applied to the rate if a higher coinsurance percentage is selected. A 1.50 surcharge is applied to the rate if the no-coinsurance option is selected.
Limit
of Insurance Relativity Factor
This factor was added in 2011. It is based on the fact that properties with high values are less likely to sustain a total loss than properties with low values. Therefore, there is a statistical redundancy in larger rates. ISO introduced this new factor in order to eliminate that redundancy. The Group I factor is based on the building's construction and the covered property's limit of insurance. The Group II factor is similar but does not consider construction in developing the relativity. Buildings use a neutral limit of $250,000. Personal property has a neutral limit of $50,000. Limits below the neutral limit are surcharged, while limits above the neutral limit receive a credit.
GROUP
I RATING FORMULA
Fire, lightning, explosion, vandalism, and sprinkler leakage are the causes of losses considered Group I.
The premiums for building and personal property are developed individually using the following formula:
Step 1: Determine the Group I loss cost based on CSP Class code or specific rate described above.
Step 2: Multiply step 1 by the company loss cost multiplier (LCM) in order to develop a rate.
Step 3: If the risk is class rated, multiply step 2 by the territory multiplier. Use 1.00 if not class rated.
Step 4: Multiply step 3 by the coinsurance factor that applies.
Step 5: Multiply step 4 by the Limit of Insurance Relativity Factor to develop the final rate.
Step 6: Multiply step 5 by the limit of insurance (per $100).
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Example: Champion Condominiums insures its building for $3,000,000 at 90% coinsurance and its personal property for $350,000 at 80% coinsurance. The Group I premium is developed as follows:
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GROUP
II RATING FORMULA
Wind and hail are the two primary Group II causes of loss, but it also includes smoke, aircraft, vehicles, riot, civil commotion, sinkhole collapse, and volcanic action. A symbol is assigned to a risk either through class rating, special class rating, or specific rating. The symbols are:
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AA |
Superior Construction |
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A |
Wind Resistive Construction |
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AB |
Semi-wind Resistive Construction |
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B |
Ordinary Construction |
In addition, a numeral can be placed before the symbol. For example, symbol 4B means the basic initial loss cost must be multiplied by a factor of 4 to develop the adjusted initial loss cost. The loss cost is listed in the state loss cost tables for the symbol that applies.
The premiums for building and personal property are developed individually using the following formula:
Step 1: Determine the Group II loss cost based on Class Code or specific rate.
Step 2: Multiply step 1 by the preceding numeral (if applicable).
Step 3: Multiply step 2 by the company loss cost multiplier (LCM) to develop the rate.
Step 4: Multiply step 3 by the applicable coinsurance factor.
Step 5: Multiply step 4 by the Limit of Insurance Relativity Factor to develop the final rate.
Step 6: Multiply step 5 by the limit of insurance (per $100).
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Example: Champion Condominiums insures its building for $3,000,000 at 90% coinsurance and its personal property for $350,000 at 80% coinsurance. Champion’s Group II symbol is B and Group II premium is developed as follows:
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ENHANCED
WIND RATING PROGRAM
ISO introduced an enhanced wind rating program in 2013. Its use and availability are determined at the state level. In states where it is used, certain buildings are not eligible for the class rated Group II rating described above. Instead, the Group II rate is developed based on its own specific wind hazard characteristics. The determination as to what buildings are specifically rated begins with the county where the building is located. The county is ranked as either low, medium, high, or severe. If the county rating is low, all buildings in that country continue to be class rated.
If the county rating is medium, all buildings with 50,000 or fewer square feet will be class rated.
If the county rating is high, all buildings with 25,000 or fewer square feet will be class rated.
If the county rating is severe, all buildings with less than 10,000 square feet will be class rated.
All buildings that do not fit within the class rating criteria are subject to site-specific rating.
This program’s benefit is that it encourages positive, proactive loss prevention measures by the individual building owner.
OTHER CAUSES OF LOSS
The rating manual explains the formulas to rate all other causes of loss. While it is important to follow the specific rules, the insurance company must multiply the loss cost factor developed by its loss cost multiplier to determine the final rate.
BLANKET OR AVERAGE RATING
When a commercial property coverage form insures more than one building or item of property, the insured may want to cover them on a blanket basis. It selects a value sufficiently high to cover all property to be insured on a blanket basis that becomes the coverage limit. This approach avoids coinsurance and underinsuring individual items of property when more than one is insured, as long as the overall limit is adequate.
Most condominiums prefer to blanket all values together because the development is viewed more as one blanket amount than the values of each individual building.
Note that the basic rating to get to the blanket approach is the same. Each building and its property limits are rated the same way as specific coverage. The premiums are then added together and divided by the total limit to determine the blanket rate. This rate is recalculated annually, subject to receipt of a statement of values that lists the values per building or structure that apply. The insured pays a slight surcharge in the form of a reduced coinsurance credit when blanket treatment is used because it is to the insured's advantage, not the insurance company's.
INDIVIDUAL
RATING MODIFICATIONS
Certain modifications are available to apply to the premiums determined as outlined above. Some of these are based on additional coverage features selected, while others are based on restrictions or exclusions added to the coverage. In addition, some modifications are based exclusively on the insurance company underwriter's opinion.
Related Article: ISO Condominium Association/Condominium Commercial Unit-owners Coverage Forms Underwriting Considerations
JUDGMENT RATING
Judgment rates are developed for specific individual risks or situations. The difference between specific rates and judgment rates is that judgment rates are based on the insurance company underwriter's opinion or judgment, not on an ISO (or other rating organization) inspection and rate publication. These rates are usually determined after completing a detailed analysis or inspection of the risk's exposures and hazards. They are used most often in cases where there is no credible background or basis to determine a rate in the usual way, and only the underwriter's knowledge and judgment is available. In other cases, they are used to apply to hazards, operations, or occupancies that are new, different, unusual, or that have some other unique factor that prohibits the risk from being rated in the usual way. These rates are subject to the rules and regulations of the state where the risk is located. An individual rate filing may be required.
CONCLUSION
Rating's purpose is to develop a rate and premium that is fair, equitable, and credible, based on the exposures relative to the coverage provided. The rate must be adequate for the class, so the insurance company collects sufficient premium to pay losses and expenses. As with any business operation, the rate must also allow for a reasonable amount of profit for the insurance company to continue operations and attract investors. It must be noted that the insured has the power to influence the initial rate. Even small changes in construction, occupancy, protection, and exposure can significantly affect the premium. As the named insured works to reduce its rate, it also works on reducing the chance of sustaining a serious loss.