(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.
Many commercial operations have private passenger vehicle exposures along with their commercial exposures, such as trucks, tractors, and trailers. 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.
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 that is 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 for determining a Business Auto Classification is whether the vehicle is part of a fleet. Fleet and Non-Fleet classifications are available. There must be at least five self-propelled vehicles under the same ownership to qualify for the fleet category. 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 evaluated at each renewal.
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 it. 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 it.
Once the GVW or GCW is determined, the actual class is determined based on one of the following:
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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 of 2,000 pounds or greater |
|
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 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.
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Example: A plumber’s truck is considered service because it is driven to the place requiring plumbing service and remains there for the duration of the job. |
Retail use applies to vehicles used to pick up property from or to deliver property to individual residences.
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Example: A store that delivers a water heater to a residence to be installed by another party, such as a homeowner or plumber, is classified as retail. |
Commercial use applies to vehicles used to transport property. A vehicle is considered commercial when it delivers equipment to a business.
Vehicles used more than one way are assigned to the highest rated classification unless 80% or more of its operation is in a lower rated class.
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Example: An electronics supply house delivers to both households and businesses. If household deliveries comprise 80% or more of its use, its vehicles are classified as retail. If household deliveries make up less than 80% of its use, they are classified as commercial. |
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 their operation is in a lower rated class.
The business auto premium is calculated based on Rule 22.1 of the ISO Countrywide Commercial Lines Auto Manual and applies to other than zone-rated risks. A classification-rating factor and class code must be developed for each vehicle before doing any rating. The classification is used in rating both Liability and Physical Damage but is not used with Medical Payments and Uninsured/Underinsured Motorists. The primary classification is based on the vehicle's size, business use and operating radius, while the secondary factor is based on special industry features. These factors are in the state exception pages under Rule 23.
1. Determine the classification for each vehicle.
2. Determine the garaging territory. This may not necessarily be the business address. Vehicles garaged at an employee's home are principally garaged at that address. If the business is located in a territory with high rates, the premium may be lower if drivers who live outside that territory take those vehicles home with them.
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.
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 plans.
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.
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. This plan also applies to Garagekeepers Legal Liability and Auto Dealers Physical Damage Coverages.
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 by a specific insurance company must be examined in detail.