(October 2022)
The Insurance Services Office (ISO) formula to calculate the premium for commercial motor carrier exposures is relatively simple and straightforward, but the individual component parts require some explanation. The ISO premium computation rules are in the Commercial Lines Manual, Division One, Automobile.
Some motor carrier operations may have private passenger vehicle exposures along with their commercial fleets. While the two exposures share some similarities, each is subject to a different rating formula. Private passenger vehicles use Insurance Services Office (ISO) Auto Rules 31 through 34, while trucks, trailers, and tractors use Auto Rules 21 through 25.
The garaging territory has more impact on vehicle rating than any other criteria and should be taken seriously. It is based on the street address where the vehicle is principally garaged. This may or may not be the named insured's address. If employees take vehicles home, that is where the vehicle is principally garaged. This can be particularly important when businesses operate in more than one state and vehicles are garaged in a different state.
The garaging territory is both a rating consideration and a coverage issue because the coverage and cancellation rules apply based on the vehicle's garaging location.
PRIVATE PASSENGER RATING
Private passenger vehicles are rated according to loss costs provided in the territory for the state where they are principally garaged, but there is one exception. Rule 31 provides details on when additional factors may apply to a particular risk. It is important to review the definition of a private passenger vehicle when rating them. A pickup, panel truck, or van not used for business purposes can be rated as a private passenger vehicle.
Commercial vehicle classifications are based on a number of criteria.
One of the first criteria in classifying motor carrier operations is determining if vehicles are part of a fleet. Fleet and Non-Fleet classifications are available. At least five self-propelled vehicles under the same ownership are required to qualify as a fleet. Four or fewer such vehicles are in the non-fleet category.
Mobile equipment and trailers are not considered when determining fleet/non-fleet status.
The fleet status does not change during a policy year, but it must be revaluated at each renewal.
The three use classes are Service, Retail, or Commercial.
Service use means that the vehicle is operated on a limited basis and is primarily at job locations. Service vehicles are used to move the insured's personnel, tools, equipment, and/or supplies to and from jobs.
Retail use applies to vehicles used to pick up property from or deliver property to individual residences.
Commercial use applies to vehicles used to transport property. A vehicle is considered commercial when it delivers equipment to a business.
Note: Vehicles used in more than one way are assigned the highest rated classification unless 80% or more of its operation is in a lower rated class.
The size class is determined by the Gross Vehicle Weight (GVW) or the Gross Combination Weight (GCW) of each vehicle and applies to each vehicle individually. GVW is the combination of the actual weight of the vehicle plus the manufacturer's designated maximum load capacity of that vehicle. GCW is the combination of the actual weight of both the truck-tractor and semitrailer or trailer plus the manufacturer's designated maximum load capacity of that vehicle.
Once the GVW or GCW is determined, the actual class is determined based on one of the following:
|
Vehicle |
Description |
|
Light Trucks |
Trucks with a GVW of 10,000 pounds or less |
|
Medium Trucks |
Trucks with a GVW of 10,001 to 20,000 pounds |
|
Heavy Trucks |
Trucks with a GVW of 20,001 to 45,000 pounds |
|
Extra-Heavy Trucks |
Trucks with a GVW over 45,000 pounds |
|
Heavy Truck-Tractors |
Autos with or without a body but with a wheel coupling device for semitrailers with GCW of 45,000 pounds or less |
|
Extra-Heavy Truck-Tractors |
Autos with or without a body but with a wheel coupling device for semitrailers and GCW over 45,000 pounds |
|
Semitrailers |
Trailers with a fifth wheel used with a truck-tractor rig having a load capacity over 2,000 pounds |
|
Trailers |
Trailers without a fifth wheel with a load capacity greater than 2,000 pounds |
|
Service or Utility Trailers |
Trailers with a load capacity of 2,000 pounds or less |
The three radius classes are Local, Intermediate or Long Haul. ISO rules specify that the radius is determined based on a straight line from the principal garaging location street address to the destination. It is important to know if vehicles are garaged at the main location or at the driver's home because it could mean the difference between local and intermediate rating, and the difference in premium could be significant.
Local radius is up to 50 miles. This means the vehicle does not regularly operate more than 50 miles from the principal garaging location street address. “Regularly” is not defined but is considered as the normal day-to-day operations of the driver and anticipated use of the vehicle. The rating is not affected if it is occasionally driven further than 50 miles away, but the next category should be used if a regular customer is more than 50 miles away.
Intermediate radius is from 51 to 200 miles. This means the vehicle regularly operates more than 50 miles and less than 200 miles from the principal garaging location street address.
Long Distance refers to vehicles regularly operating in a radius greater than 200 miles from the principal garaging location street address. Zone rates apply to anything other than light trucks when the Long Distance class is used.
These classification factors apply to special industry codes. The named insured's actual industry or operation determines the appropriate secondary rating factor. If more than one secondary rating factor applies, vehicles having more than one secondary rating factor are assigned the highest rated classification unless 80% or more of its operation is in a lower rated class.
Once the garaging territory and the classification code are established, the loss costs can be developed.
1. Liability
Step 1. Locate the loss cost on the loss cost page.
Step 2. Multiply Step 1 by the company specific loss cost multiplier to develop the rate.
Step 3. Multiply Step 2. by the applicable deductible in Rule 98.
Note: This deductible credit applies to only the base loss cost, not to the increased loss cost. As a result, the calculation requires two steps when a deductible applies.
Step 4. Multiply Step 2. by the increased limits factor in the state exception pages. If a deductible applies, refer to rule 98 for a rating example.
Step 5. Multiply Step 4. by the fleet
multiplier, if any.
Step 6. Multiply Step 5. by the combined rating factor. This is developed using the primary and secondary classification factor.
2.
Physical Damage–Actual Cash Value Basis
Step 1. Select the appropriate base loss cost from Rule 23 in the state loss cost territory pages.
Step 2. Multiply Step 1 by the company specific loss cost multiplier to develop the premium.
Step 3. Find the age and original cost new factors in Rule 101 in the exception pages.
Step 4. Multiply Step 2. by the factors in Step 3.
Step 5. Develop the deductible amount based on Rule 98 and add to or subtract from Step 4.
Step 6. Multiply Step 5 by 1.25 if the vehicle is capable of dumping its load.
Step 7. Multiply Step 6. by any applicable fleet factor.
Step 8. Multiply Step 7. by the combined rating factor. This factor is developed using the primary and secondary classification factor.
In addition to Liability and Physical Damage, Medical Payments, No-Fault and Uninsured/Underinsured Motorists must also be rated. Because premium calculations for these coverages do not use the primary and secondary factors, they can be selected from the applicable territory table in the state loss costs.
The developed premium can be further modified by experience and schedule rating. In addition, some endorsements selected have an effect on the rating formula.
3.
Zone Rated Vehicles
Trucks, tractors, or trailers that are not classed as light and that regularly travel over 200 miles are zone rated. Rule 25 explains how the rating is done.
Note: Much of this rating follows the items 1 and 2 above for establishing the zone combination based on the principal garaging location and the most distant terminal a vehicle travels to.
|
Example: The terminal is located in Cincinnati, Ohio, Zone 07. The truck regularly travels to Indianapolis (Zone 14), St. Louis (Zone 34), Kansas City (Zone 16), Dallas (Zone 09), and New Orleans (Zone 25). Because Dallas is the most distant point, it is combined with the Cincinnati zone. As a result, the base premium is found by going to the Table for Zone 07, Cincinnati and locating the premium for Zone 09, which is Dallas. |
4. Gross Receipts or
Mileage Reporting Basis
This rating approach is similar to reporting property values. The rating formula outlined in items 1, 2, and 3. above is followed at inception. A gross receipts or mileage rate is then determined by dividing the premium by the estimated gross receipts or mileage. At the end of the year, the final gross receipts, or mileage are multiplied by the rate to determine the final premium. At renewal, a new gross receipts or mileage rate is determined by re-rating the auto premium based on the current auto schedule.
Motor Carriers may have unique exposures that must be rated when they are covered.
1.
Bobtail Operations
Bobtailing occurs when a trucker uses a vehicle in a non-trucking situation. CA 23 09–Motor Carriers–Insurance for Non-Trucking Use must be attached. Liability premium is developed the same as for other trucks and tractors, but a factor of 1.50 is used, and there is no secondary factor.
Related Article: CA 23 09–Motor Carriers–Insurance for Non–Trucking Use
2. Trailer Interchange Agreements
The premium is developed based on the type(s) of agreement(s). Rule 24.B. 2 must be followed to properly develop the premium.
3. Motor Carrier Operations–Hold Harmless
Agreements
This involves the cost of hire coverage. Rule 24. B.3 describes how to develop the premium and applies when written hold harmless agreements exist. It applies when CA 23 08–Motor Carriers Excess Coverage for The Named Insured And Named Lessors For Leased Autos or CA 23 12–Motor Carriers–Named Lessee As Insured are attached.
Experience
Rating Plans
ISO experience rating plans vary by state, but not all insurance companies use them. Some use their own modified development factors. This is a general overview of the ISO plan. It develops credits or debits that are applied to motor carrier rating and is based on the actual loss experience of the individual risk. The credit or debit may modify the liability premium, the physical damage premium, or both.
The experience modification is determined based on the risk's most recent three full years of loss experience. One year's experience can and should be used if three years of experience is not available. Since the experience period must end at least six months prior to the rating date, this effectively eliminates using the current year's experience.
The formula develops a maximum single loss amount that caps individual losses. In this way, one large loss does not unfairly skew the calculation. In addition, a credibility factor and an expected experience ratio are developed based on the size of the premium.
This is the formula to calculate the Experience Modification Factor:
Step 1. Develop the premium to use in the Actual Experience Ratio by using the insurance company’s factors.
Step 2. Develop the losses to use in the Actual Experience Ratio by using three years loss experience subject to capping rules.
Step 3. Divide Step 2 by Step 1
Step 4. Subtract the Expected Experience Ratio from the Actual Experience Ratio.
Step 5. Divide Step 4. by Step 3
Step 6. Multiply Step 5 by the Credibility Factor.
If Step 6. is a negative number, it is a credit. If it is a positive number, it is a debit.
Refer to the ISO Rating Manual for complete details on doing the calculations.
Schedule
Rating Plans
ISO schedule rating plans
vary by state, but not all insurance companies use them. Some use their own
modified development factors. This is a general overview of the ISO plans.
Liability
Premiums charged for an individual risk may be modified by schedule rating table factors that reflect its specific characteristics. These factors cannot duplicate factors used in the basic rating or in the experience rating. The risk must develop a certain minimum premium to be eligible for schedule rating.
The specific characteristics used to justify the credits or debits for an individual risk's liability exposure are:
A. Management–cooperation and compliance with recommendations
B. Employees–selection, training, supervision, experience, and basis of remuneration
C. Equipment–type, condition, care, own repair facilities
D. Safety Organization–meetings, distribution of safety literature, award, and penalty system, review of accidents with drivers, safety director, accident reports, and records
Physical Damage
Similar to Liability coverage, premiums charged for an individual risk may be modified by schedule rating table factors that reflect its specific characteristics.
The specific characteristics used to justify the credits or debits for an individual risk's physical damage exposures are:
A. Management–cooperation and compliance with recommendations
B. Employees–selection, training, supervision, experience, and basis of remuneration
C. Equipment–type, condition, care, own repair facilities
D. Safety Organization–meetings, distribution of safety literature, award, and penalty system, review of accidents with drivers, safety director, accident reports, and records
E. Dispersion or concentration of insured values
Note: This rating plan varies significantly by state. This explanation is very limited, and the actual plan approved for use in a given state used by a specific insurance company must be examined in detail.