INTRODUCTION

The American Association of Insurance Services, Inc. (AAIS) Commercial Output is not rated using the standard property rating procedure, which rates each type of property individually using a prescribed and rigid formula. This product is rated as a whole, with one rate applying to all buildings and another rate applying to all business personal property. This approach requires the underwriter to have sufficient information developed through applications and loss prevention reports to assign deficiency points for the specific exposure.

The final rate for the Program is made up of two parts. The first is the Normal Loss Basic Charge. It is the portion of the rate that addresses minor losses. The second is the Major Loss Charge. This portion of the rate addresses larger losses. Small losses are less than $5,000. Large losses exceed $5,000.

NOTE: If the deductible is $5,000 or more, the Normal Loss Basic Charge is not calculated.

STEP 1: NORMAL LOSS BASIC CHARGE

This step applies only when the policy deductible is less than $5,000.

· Add the net losses for the past three years as follows:

o Subtract the deductible amount used in the CURRENT rating.

§ The deductible that applied in the prior years is irrelevant to this step.

o The maximum of any one loss charged is $5,000. This means if a loss exceeds $5,000, only $5,000 is used in this calculation.

· Then, multiply the total amount of the losses by a factor of 1.8 and divide the result by the sum of the insured values, per $100, for the past three years.

The result from this calculation is the Normal Loss Basic Charge.

NOTE: If the deductible selected applies on a per peril basis, with one or more perils having a higher deductible, or if deductibles vary by location, use the highest deductible that applies to the exposure.

*Example:* Rogers Cutlery is being quoted under the COP in 2025. The losses are as follows:
Adjusted Losses Date of Loss	*Total Losses*	Maximum Loss (capped at $5,000)	Deductible being quoted	*Chargeable Losses*
2024	1 @ $7,000	$5,000	$1,000	$4,000
2023	1 @ $3,000	$3,000	$1,000	$2,000
2022	1 @ $1,500	$1,500	$1,000	$500
2021	1 @ $10,000	$5,000	$1,000	None - more than 3 years old
Total	4 @ $21,500	$14,500		$6,500
*Total Adjusted Losses*		$6,500 X 1.8 factor = $11,700
*Insured Values by Year:*
*Year*	*Building and Business Personal Property (BPP) Values*
2024	$5,000,000
2023	$4,800,000
2022	$4,200,000
Total	$14,000,000
*Normal Loss Basic Charge*	$11,700 Total Adjusted Losses divided by $140,000 Total Values per $100 = .083

STEP 2: BASIC MAJOR LOSS LOADS

A. Determine the classification group number from the Classification Table/Property Coverage in the COP Rating Manual.

Example: Cutlery Manufacturing is Classification Group Number 3.

B. Using the group number from the Classification Table/Property Coverage, find the appropriate load factor for both buildings and business personal property from Table A – Basic Major Loss Load.

Example: The Major Loss Load for Rogers Cutlery is .020 for Buildings and .080 for Business Personal Property.

STEP 3: DEFICIENCY POINTS

The real customizing in the rating process takes place in this step. The underwriter must consider each of the categories in the following Table of Deficiency Points and assign points based on an objective evaluation of how the risk deviates from a perfect risk (not an average risk) in a particular classification.

Points are assigned separately for buildings and business personal property. The points are assigned based on an overall analysis of all buildings and business personal property at all locations. Points are not assigned separately for each location.

NOTE: Deficiency points should not be assigned for flood, earthquake, or backup of sewers if those coverages are not provided.

*Example:* Rogers Cutlery has three locations that must be evaluated by the underwriter using this worksheet. The underwriter has the application, a financial statement, and a loss prevention report for each location to aid in the evaluation. The underwriter completes the deficiency points and provides is/her reasoning:
DEFICIENCY ITEM	POINTS	BUILDINGS	BPP
A. Disaster exposure–concentration of property Cutlery’s three locations are in three different states, with values roughly the same at each location.	0 to 5,000	0	0
B. Climatic hazards not contemplated in the rate Two locations are in areas with significant wind exposure.	0 to 750	250	50
C. Special occupancy or production conditions—mixed occupancies, processing, traffic, fire, explosion, water damage and theft Sparking potential, some metals are attractive to thieves.	0 to 5,000	500	1,400
D. Lack of private protection–sprinklers, alarms, other No theft alarms or watchperson service.	0 to 5,000	200	1,000
E. Inadequate public protection–concentration of values in poorly or unprotected areas, problems with fire department access to premises One location is unprotected, with protection class 10.	0 to 5,000	1,000	2,000
F. Adjacent structures, neighborhood, other location concerns One location has a fireworks factory next door.	0 to 750	750	750
G. Construction, large values in frame buildings, condemned or dilapidated buildings, unrepaired damage, poor conditions All locations are masonry non-combustible construction and are in excellent condition.	0 to 1,500	0	0
H. Combustibility and susceptibility not usual to the industry, unusual packaging, highly damageable goods beyond the norm. No unusual exposures for a cutlery manufacturing operation.	0 to 1,500	0	0
I. Extending coverage to excluded perils or specific insurance on normally excluded property Pollutant Cleanup limit increased to $100,000.	0 to 1,500	1,000	0
J. Transit, floating equipment exposures greater than contemplated for the industry, subrogation restrictions on goods in transit or bailment Rogers Cutlery has no transit coverage.	0 to 5,000	0	0
K. Flood potential based on location Flood coverage applies at all locations, but only one is in an area prone to flooding.	0 to 5,000	1,000	200
L. Earthquake and volcanic action exposure Earthquake coverage applies at all locations, but all are in areas with low earthquake potential.	0 to 5,000	750	750
M. Lower deductibles on select properties/perils All deductibles are $1,000 or higher.	0 to 1,000	0	0
N. Extension of coverage to income coverages not anticipated in class There are no extra extensions of coverage.	0 to 1,000	0	0
Total Points	0 to 43,000	5,450	6,150

Some insurance companies develop grids or charts to assign a more narrowly defined range of points for specifically defined hazards or exposures. For example, an individual insurance company may assign anywhere from 1,000 to 1,500 deficiency points for a non-sprinklered frame building and from 700 to 1,200 deficiency points for a non-sprinklered masonry non-combustible building.

A building situated on a known earthquake fault line may be assigned all 5,000 deficiency points if it is the only location, but only 500 if its values represent less than 5% of the total value of all property locations, none of the other locations being in an earthquake zone. Assigning deficiency points must reflect the facts and characteristics of the risk, while also recognizing the opportunity for sales and profitability.

Other insurers will require the underwriter to consider the traditional rating approach and then apply factors that address the broader coverages provided by the COP.

STEP 4: CONVERT POINTS TO CHARGES

The total buildings and business personal property deficiency points developed in Step 3 are converted to a building and business personal property deficiency point charge using Table B. This table assigns the charge based on the range where the deficiency points fall.

*Example:* From the Rogers Cutlery deficiency points determined above:
Type of Property	Deficiency points	Deficiency point range	Charge
Building	5,450	5,401–5,450	.620
BPP	6,150	6,101–6,200	.862

STEP 5: CALCULATE THE MAJOR LOSS LOAD

Add the Major Loss Load determined in Step 2 to the Deficiency Point Charge determined in Step 4 to arrive at the major loss load.

*Example:* From the Rogers Cutlery deficiency points and major loss load determined above:
*Deficiency Point Charge from Step 4 +*	*Basic Major Loss Load From Step 2 =*	*Major Loss Load*
Buildings: .620 +	.020 =	.64
BPP: .862 +	.080 =	.942

STEP 6 & 7: DETERMINE THE COP FACTOR

Add the Normal Loss Basic Charge to the Major Loss Load to determine the COP Factor.

NOTE: If the deductible is $5,000 or higher, the normal loss basic charge is zero.

*Example:* Rogers Cutlery normal loss basic charge and major loss load determined above:
Coverage	Normal Loss Basic Charge +	Major Loss Load =	COP Factor
Building	.083 +	.640 =	.723
BPP	.083 +	.942 =	1.025

STEP 8: DETERMINE THE COP PREMIUM FOR EACH LINE OF BUSINESS

Multiply the policy limit (per $100) by the COP Factor from Step 6 & 7 to determine the COP premium for each line of business.

*Example:* Rogers Cutlery buildings limit is $5,000,000, and the business personal property limit is $3,000,000.
Coverage / Limit of Insurance	COP Factor x	Per $100 of Limit =	Premium
Building / $5,000,000	.723	$50,000 =	$36,150
BPP / $3,000,000	1.025	$30,000 =	$30,750

STEP 9: DETERMINE FINAL COP PROPERTY PREMIUM

Adding the building and business personal property premiums together determines the final COP premium. However, if the deductible is $5,000 or more, then the deductible factor is obtained from Table C. If the deductible is less than $5,000, no additional factors are applied.

STEP 10: AUTOMATIC ANNUAL PROPERTY INCREASE

If an automatic annual property increase is desired, consult Table C (Automatic Increase) to find the appropriate percentage factor.

ENDORSEMENTS

Most endorsements have their own specific and separate rating. Refer to the rating instructions in the COP Rating Manual for specific endorsements. Some endorsements that provide additional perils or coverage, such as earthquake and flood, are not rated separately but are charged for by assigning higher deficiency points to recognize the additional exposure created by adding the peril or coverage.