When a client gets a quote for product liability or general liability insurance, most of the time they go right to the bottom line: “what is the annual premium?”. It’s human nature to want to zero in on the costs.
However, the problem with only comparing premiums is that it may not be telling you the whole story.
3 Things To Consider With Your Insurance Premiums
There are three items insurance carriers use that can impact your general and product liability insurance premium. It is important to understand and review these items before purchasing your policy.
They are:
- Class Codes
- Rate per $1,000 of Sales
- Estimated Annual Sales
When you understand how an insurance company develops your general and product liability insurance premium, you will be better equipped to make accurate comparisons and a more informed purchasing decision.
Let’s take a deeper look at what each of these points mean and how they affect you.
1. Class Codes
What is a class code? A class code is a way for insurance carriers to identify specific sectors of business, the type of work performed, and exposures associated with the business operations.
General and product liability class codes help insurance carriers predict business risk and exposure levels based on their industry. There are different organizations that create class codes (such as SIC, NAICS, and NCCI), but the insurance industry mostly looks to those made by the Insurance Services Office (ISO).
These class codes are important in helping insurance carriers develop appropriate rates for businesses within specific class codes and sectors. Carriers use class codes to track claim trends with similar businesses, which allows them to see the common risk, operations, and exposures you may have. This helps them underwrite your policy, set limits, and generate your premiums.
It is important to review your class code and question whether the class code listed on your policy is accurate. If an inaccurate class code is provided to an insurance carrier, it could negatively impact the policy premium—and even worse, it could impact the insurance coverage.
Although there are thousands of ISO class codes, sometimes you may have a unique product liability exposure that doesn’t exactly fit any of the existing class codes. That is not a problem. The insurance agent and underwriter will determine the class code that is closest to your business description and use that for the rating structure.
2. Rates
Once a class code is assigned, an associated rate for that class code will be used by the insurance carrier to calculate your premium. It is important to understand that the “rate” is different from the “premium”.
The rate is an internal factor developed by the insurance carrier for the exposure of the class of business. How the premium is determined is addressed later.
For example, you are a hammer manufacturer looking for general and product liability insurance. The underwriter assigns the business a class code of “tool manufacturers – hand type – not powered” and an associated rate for that class code. For this example, we will use a rate of $2.00 P/$1,000 of sales. The assigned $2.00 rate for “tool manufacturers” will be used as a calculation basis to determine your estimated annual premium.
3. Annual Sales
Your gross annual sales are a key component in premium calculations. Carriers need to know a rough estimate of what you make each year since the volume of sales impacts your risks.
The more products you sell, the higher number of people who may be impacted by your business. If you were to end up with a defective product, there’s a higher risk of more injuries or damages occurring. This means you have higher claim costs to face, and the insurance carrier needs to be prepared to possibly help you handle these expenses.
Calculating Your Premium
Again, your “rate” and your “premium” are not the same. Based on the hammer manufacturer example above, we determined that the rate for a “tool manufacturer” is $2.00 per $1,000 of sales, but we still do not know the annual cost of your general and product liability insurance.
To develop your estimated annual premium, we will need to multiply the exposure (for product liability, the exposure is annual sales) by the determined rate. For this example, we will use $1,000,000 of estimated annual sales.
Premium Calculation Example:
Calculated rate per $1,000 of sales equals $2.00. So, for every $1,000 of sales your company produces, you will be charged $2.00 by the insurance carrier.
Estimated Annual Sales = $1,000,000 ($1,000,000/1,000 = 1,000)
Premium Calculation: (Sales P/$1,000) X (Rate) = Estimated Annual Premium
1,000 x $2.00 = $2,000.00 Estimated Annual Premium
We use the terminology of “estimated annual premium” because the sales a company provides to the insurance company is an educated guess. Many factors can affect the annual sales of a company over a period of 12 months. The sales used to determine the premium may be higher or lower than initially stated. This means the exposure to the carrier could be higher or lower than initially anticipated.
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Audits
Most general and product liability insurance policies have audit provisions. Because the premium is based upon exposure (estimated annual sales figure provided by you), the insurance company has the option to verify the actual sales against the estimated sales you provided when you purchased the policy.
Although the word “audit” can be alarming, there is no need to panic. A typical general and product liability audit looks at:
- Your business gross sales
- ISO class code
- Changes in exposures from the prior year
Depending on the results of the audit, and the type of liability policy you have, you could:
- Get a refund of the premium paid because your exposure (sales) was lower than estimated, or
- Have an additional premium because your exposure (sales) increases more than the estimated sales provided at the purchase of the policy.
If an insurance carrier requests an audit, it is extremely important that you send any documents or information they request to complete their audit.
Putting It Together
Now that you have a better understanding of how an insurance company develops your general and product liability premium, we want to show you how the rate, exposure (sales), and premium appear on the policy:
Classification & Premium Example
| Class Code | Class Description | Basis of Premium | Exposure | Rate | Premium |
|---|---|---|---|---|---|
|
56806.03.22 |
Medical, Dental, Hospital or Surgical Equipment or Supplies Mfg. – non expendable |
Per $1,000 Gross Sales |
3,000,000 |
1.83 |
$5,500 |
Class Code: Assigned by insurance carrier
Class Description: Description of business operations
Basis of Premium: Identifying that “sales” is the basis of the premium
Exposure: Estimated annual sales
Rate: Rate per $1,000 of sales
Premium: Estimated annual premium
Understanding the rating structure of a policy can help make a better comparison between policies. If there are differences in policy premiums, it is always good to compare how the policy has been rated.
Here are some simple areas to review:
- Are the class codes and class descriptions the same?
- Are the sales the same?
- What is the difference in the rate?
Differences in class codes and descriptions can be legitimate but should be questioned. There are times when a salesperson will manipulate class codes and sales figures for the sole purpose of obtaining a lower premium to get your business. This is not only an unethical practice but could cause coverage and audit problems for your business.
By understanding class codes, rates, and how your premium is developed you can make more informed decisions about your general and product liability insurance policies. In addition, you will be better equipped to question irregularities and inconsistencies in the premiums provided to you.
For more information on the content provided or any other insurance questions, please contact an Insurance Canopy representative at 844.520.6993.
All policies have specific limitations, conditions, and exclusions. Please refer to your policy for exact coverages.
