Commercial general liability insurance provides coverage for a diverse mix of insureds—everything from large, complex risks with operations spanning multiple industries to individual contractor-owners specializing in a single trade. Insurers writing general liability have to strike a careful balance when it comes to pricing risks of different sizes. If smaller risks pay too little in premium relative to their eventual losses, the insurer could lose money. If large risks pay too much, they may want to shop around for a better deal. Or vice versa.
By incorporating the Size of Risk Rating Supplement, insurers may be able to target or retain larger risks with lower premiums, while more accurately accounting for the loss potential of smaller risks at renewal or when quoting new business.
That’s why we’ve created an entirely new way to account for the impact of risk size on insurers’ general liability losses with our new, optional General Liability Size of Risk Rating Supplement.
The Size of Risk Rating Supplement features a unique set of multistate rules, rating factors, and state loss costs. Based on our research, the combination of the new rating factors and loss costs is a measurable enhancement to the standard general liability rating—especially when evaluating large and very small risks. By incorporating the Size of Risk Rating Supplement, insurers may be able to target or retain larger risks with lower premiums, while more accurately accounting for the loss potential of smaller risks at renewal or when quoting new business.
Crunching the numbers: Why risk size matters
Risk size refers to the number of exposure units associated with the risk. Exposure units can be anything from a business’s payroll to the square footage of commercial office space. The Size of Risk Rating Supplement uses the premium base assigned to each general liability classification as its exposure unit. For example, payroll is the ISO General Liability premium base for most contracting and service risks, so the higher the payroll, the larger the risk.
The Size of Risk Rating Supplement was developed using a unique general liability dataset that we extracted from the ISO Statistical Database, and includes risks for both premises/operations and products/completed operations coverages. Within the dataset, we matched exposure and loss information from nearly 18.5 million general liability policies representing roughly $43 billion in earned premium over ten years. We then applied sophisticated modeling techniques to better understand how risk size can affect insurer losses. (If you want a deeper dive into the mathematics and modeling behind the supplement, you can view it here—log-in required.)
Generally speaking, we found that the loss cost per unit of exposure for both of the general liability coverages analyzed decreases as the size of the risk increases. Our research showed that most classes with different premium bases have size of risk differences. For example, a plumber with a payroll of $2 million will have a lower loss cost per unit of exposure than a plumber with a payroll of $500,000.
While the source of the size of risk effect is not certain, larger companies may have better risk management practices and/or it may be the case that, as companies grow, their loss potential doesn’t grow at the same rate—a store that doubles gross sales from $1 to $2 million a year may not double its loss propensity.
Keeping it simple
We understand the challenges in implementing rating methodology changes in complex technology systems. So, for insurers interested in integrating the new General Liability Size of Risk Rating Supplement into their general liability program, we’ve aimed to make it as easy as possible. Rather than an elaborate new formula, we’ve simply added a multiplicative factor that gets slotted into the existing ISO Commercial Lines Manual General Liability rating algorithm.
There are also size of risk-specific loss costs that replace the standard ISO General Liability Loss Costs in the existing rating formula. In addition, the factors, mapping tables, and companion size of risk advisory prospective loss costs are available in Microsoft Excel to help you quickly access the data and begin working with it.
The new size of risk loss costs and rating factors won’t replace the standard ISO general liability rating factors or advisory prospective loss costs. Rather, the new loss costs and rating factors are an optional alternative source of information for insurers to consider when determining general liability premiums. If our research is any guide, there’s a good chance you’ll like what you see.
We began filing the new Size of Risk Supplement in July 2021 on a state-by-state basis. It’s available to companies that currently license ISO General Liability Program’s rules and loss costs.