ISO PRODUCTS/COMPLETED OPERATIONS LIABILITY COVERAGE FORMS RATING CONSIDERATIONS
(July 2024)
INTRODUCTION
The Insurance Services Office (ISO) files its rules for calculating premium with state insurance departments. This analysis is based on the Commercial Lines Manual, Division Six, General Liability, Rule 35, Premium Determination.
A. CLASSIFICATIONS
Determining a risk's proper classification is often the most time consuming and difficult part of rating. Classifications are in the Classification Table. General Liability Rule 25, Classifications, and Rule 26, Classifications–Scope of Application, contain important instructions concerning the table’s use.
- Classify based on the operations. If the risk has more than one operation, more than one code may be required. If no classification appears to fit a given operation, it should be referred to the insurance company for consideration and for guidance on the proper classification to use.
- Footnotes in the Classification Table must be examined carefully to completely understand how to use the classification. If the footnotes are at odds with, differ from or disagree with any other rule, the footnotes govern.
B. PREMIUM BASE
After determining the classification code, the next step is determining the premium base. It is found in the column next to the classification code in the classification table. Here are the code descriptions:
|
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 in operating expenses |
|
p |
Per $1,000 of payroll |
|
s |
Per $1,000 of gross sales |
|
t |
See classification notes |
|
u |
Per unit |
Note: Most products classes are based on gross sales and most completed operations classes are based on payroll. However, there are exceptions.
Note: General Liability Rule 24, Bases of Premium, explains what to include in each premium base as well as what to exclude. This is particularly important when using the payroll and the gross sales premium bases.
C. BASIC LIMITS RATES (LOSS COSTS)
Loss costs that apply to a particular classification are in the state loss cost pages. They are first listed by territory, then by specific classification in that territory, and are in numerical order. The appropriate loss cost must be selected.
Not every classification has a loss cost. In some cases, the data, and statistics available to rate making organizations is inadequate and not statistically credible. In other cases, the variances in exposures within a particular classification are 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 having this symbol instead of a specific loss cost must be referred to the insurance company to determine an individual loss cost or rate. Each insurance company develops its own judgment loss cost and/or final rate after it determines and evaluates the specific risk's exposures.
D. ADJUSTMENTS
The loss costs referenced above in step C. are adjusted. They are multiplied by the insurance company loss cost multiplier factor for the classification as well as by a claims-made factor if coverage is provided on a claims-made basis. They are then subject to further adjustment based on coverage change factors for certain exclusions or limitations. It is at this point that a loss cost becomes a rate.
E. INCREASED LIMITS AND OTHER ADJUSTMENTS
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. Three increased limits factors tables are available for products/completed operations rating. The increased limits table to be used for a particular classification is determined in Rule 56, Increased Limits Tables.
This is also the step where any other applicable rating modification factors are applied. The most common of these are experience rating and schedule rating.
ISO provides the rules to use for its experience and schedule rating plans. However, many insurance companies develop and apply their own factors and rating criteria to the calculations. In all cases, these factors and rating criteria must be applied on a consistent and non-discriminatory basis.
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. Factors from any of these plans are usually applied in this step. 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 applicable deductible modification factor.
Note: At the end of this step, the rate must be rounded to three decimal places. Up to this point, any loss cost/rate calculations are not rounded. This is the final rate used for both premium calculation and audit purposes.
F. EXPOSURE UNITS
The exposure unit outlined in Step B above is multiplied by the final rate determined in Step E. above.
|
Example: The rate is 1.00, the premium basis is gross sales (s) and the actual payroll is $1,000,000. The premium calculation is 1.00 X 1,000 = $1,000 because the sales rating base applies to each $1,000 of sales. |
It is also within this step where a transition factor is applied to a classification with an altered rating base. Transition factors involve a five-year period in which the old rate base is replaced. It allows the insured to adjust to the impact of higher premiums gradually. When the transition results in a higher premium, General Liability Rule 30 outlines the procedure to follow to minimize the premium impact to the insured and provides for a gradual introduction of the premium increase. On the one hand, if the premium change resulting from transition is a reduction, there is no transition period and the reduction is effective immediately.
|
Example: The classification code for Automated Files changed from a payroll basis to a gross sales basis. Because of this change, the premium for Automated Files high tech, low labor operation with significant sales nearly doubled. Rule 30 was used and the 200% increase was gradually phased in over a five-year period. |
|
G. MINIMUM PREMIUMS
Rule 14, Minimum Premiums, provides instructions to determine the minimum premium that applies to a specific risk. The base minimum premium is provided by the insurance company and is based on the applicable increased limits table.
|
Example: Little Bitty Insurance Company filed the following minimum premiums: |
|
|
Increased Limit Table |
Minimum Premium |
|
A |
$100 |
|
B |
$200 |
|
C |
$300 |
These minimum premiums are applied only once for each policy and policy period. In cases where a policy has more than one classification code, only the highest applicable minimum premium is used.
|
Example: Parigin’s policy with Little Bitty Insurance Company has two class codes. Code 55919 uses C from the increased limits table and code 55717 uses B. Since C has higher minimum premiums than B, the minimum premium is $300. The minimum premium is then multiplied by the appropriate increased limits factors. |
Note: The minimum premium determination procedure does not apply to "if any" classifications.
H. ADDITIONAL PREMIUMS
Other premium charges may apply. These include additional premium charges for additional insured endorsements and other situations requiring an additional premium charge.
I. TOTAL POLICY PREMIUM
The premium in Step H. above is added to the larger premium determined in either Step F. or Step G. This is the total estimated policy premium, subject to final audit and premium adjustment.
J. FINAL PREMIUM
The
premium determined in