The actuary will calculate the rating factors for Architects & Engineers Professional Liability by applying a series of multipliers to a base premium. The premium is calculated from an average of the gross billings from the insured’s most recent accounting periods.
The calculation process involves several factors or multipliers that are applied consecutively:
Premium Calculation: The premium is calculated based on the insured’s average gross billings, using a tiered rate system.
For example- for billings upto $50k the rate will be $40 per $1000 billings and for billings above $50k the rate may decrease to $24 per $1000 billings
Retroactive Date Factor: This factor is applied based on the number of years the insured has had a claims-made policy for this product type.
For example- A factor of 1 for policies with retroactive step of plus 5 and 0.75 for step factor less of 1. The factor of 1.00 for a 5+ year retroactive date signifies that the policy has reached a mature, standard level of risk. This is the point at which the insurer is taking on a full, “unlimited” retroactive exposure, and therefore, no credit is applied to the premium for the retroactive date.
Increased Limits Factor: The base premium is multiplied by a factor corresponding to the specific per-claim and aggregate limits chosen by the insured.
For example- Let us assume the base limit is $500k/ $500k ( per wrongful act/ Aggregate). Now if this is changed to $250k/ $250k the factor is 0.8 and for $2,000,000 / $2,000,000 the factor is 1.63.
Retention Credit Factors: These factors are subtracted from the Increased Limits Factor to reflect the retention (deductible) amount chosen by the insured.
For example- Let us assume the base retention amount is $5000. Now if this is changed to $10k use the factor as 0.07 and for $25k the factor is 0.2
Discipline Factor: The base rate is adjusted to account for the risk level of the specific professional discipline, such as Architecture or Civil Engineering.
For example- For Geotechnical / Soil Engineering the factor is 1.75 and for Electrical Engineering it is 0.35 . Geotechnical / Soil Engineering discipline involves assessing the properties of soil and rock for construction projects. Errors in this field can lead to catastrophic failures, such as building collapses, foundation issues, or landslides. The potential for large, expensive claims and the high severity of potential damages make this a higher-risk discipline.
Type of Work Performed and Delivery Method: Modifiers for these factors are derived from the distribution of the firm’s gross billings over the most recent 12 months, and are calculated by summing the percentage of fees in each category multiplied by the corresponding factor. Airport projects can be riskier than restaurants . Similarly a fast track project is riskier than consulting.
Experience Rating: For firms with less than five years of experience, a debit or credit is applied based on their loss ratio. .
Longevity Factor: Premiums are modified to reflect the number of years the insured has been in business, with firms in business longer receiving a credit.
Schedule Modifiers: Premiums can be modified based on individual risk characteristics and internal loss control programs, such as formal project planning or a written quality assurance/quality control (QA/QC) program.
