SCHEDULED RATING (A.K.A. 'RATING PLAN')

Scheduled Rating (Rating Plan) – A Method to Set Premiums

In plain language: A Scheduled Rating (or Rating Plan) in insurance is a method insurers use to calculate the cost of covering specific risks. The costs are calculated based on certain factors like safety conditions, risk characteristics, and the possible loss experience of the policyholder.

Technical definition: In property and casualty insurance, a Scheduled Rating Plan is a specific type of premium calculation model. Insurers use it to adjust the manual rates based on the individual risk of loss that a policyholder presents. These adjustments (credits and debits) are based on various factors such as physical and moral hazard, safety conditions, and loss prevention efforts. The plan is typically expressed as a percentage adjustment to the pure premium.

Think of a Scheduled Rating Plan in insurance as a customized pricing model that rewards or penalizes policyholders based on their risk management practices.

TL;DR

A Scheduled Rating Plan is a method to determine insurance cost based on specific risk factors.

It is crucial in day-to-day agency work because it directly affects the premiums clients pay.

A common pitfall is misunderstanding what risk factors are considered and how they can be improved.

A quick win for agencies is to help clients understand and improve risk factors to lower their premium.

What Is Scheduled Rating (Rating Plan) in Insurance?

In detail, a Scheduled Rating Plan or a Rating Plan is a method used in setting premiums for insurable risks based on a careful evaluation of risk characteristics. It is a method that allows insurers to calculate premium prices for a policyholder, bases on their particular circumstances. For instance, in workers compensation insurance, the Scheduled Rating Plan is applied after the application of the experience modification factor and before any premium discounts.

It takes into account the physical hazard presented by the policyholder (like the safety conditions of a workplace) and other similar risk factors. It involves analysis of statistical data and loss ratios of the insured to assess the level of risk involved. The Scheduled Rating Plan is commonly used by insurers to price insurance, especially for commercial lines of business.

The Scheduled Rating Plan is based on the individual risk presented by the policyholder which involves different aspects like risk management activities, moral hazard, physical hazard, and loss prevention efforts.

Key Related Terms to Know

Moral Hazard – The possibility that the behavior of an insured party changes in a way that increases the probability of an insurable event occurring.

Insurable Risk – A risk that meets the criteria for insurance coverage, including the requirement that it is possible to calculate an appropriate premium.

Pure Premium – The portion of an insurance premium that reflects the expected losses and loss associated expenses.

Experience Modification Factor – A multiplier derived from the experience rating of a specific employer, representing the employer's historical loss experience compared to other employers in the same industry.

Manual Rates – The initial rate set by an insurer to cover anticipated claims and expenses.

Common Questions About Scheduled Rating (Rating Plan)

How does a Scheduled Rating Plan affect an insurance cost?

A Scheduled Rating Plan can directly affect the insurance cost as it adjusts the manual rates based on evaluation of the insured's individual risk factors such as safety conditions and risk management efforts. If the insured has good safety conditions and risk management practices, they may receive credit modifiers on their premium, reducing their overall insurance cost. On the other hand, if their safety conditions are poor and risk management practices are lacking, they could be assigned debit modifiers, which would increase their insurance cost.

Why is the Scheduled Rating Plan important?

The Scheduled Rating plan is important as it allows for premiums to be accurately calculated based on the unique risk characteristics of each policyholder. It enables underwriting practice that is fair and precise. This encourages policyholders to improve their risk management procedures and accident prevention work, thereby reducing their risk of loss.

How can an agency support a client with a Scheduled Rating Plan?

Agencies can support clients by helping them understand the various factors that make up the Scheduled Rating Plan. A safety engineer can inspect the workplace to assess the risk. Based on this, agencies can advise on how to reduce these risks and thereby lower premiums. This support strengthens the relationship between the client and the agency.

Scheduled Rating (Rating Plan) vs. Experience Rating

Experience rating relates to the loss experience of an individual policyholder, while a Scheduled Rating Plan looks at a broader range of risk factors, including physical and moral hazards.

Comparison Area	Scheduled Rating (Rating Plan)	Experience Rating
Primary use case	To determine the price of insurance based on risk factors	To determine insurance cost based on claims history
Coverage / concept type	Premium calculation model	Premium calculation model
Typical exclusions	Does not typically consider loss history	Does not typically consider physical and moral hazards
Who is most affected by errors	Policyholders with poor risk management practices	Policyholders with a high claim frequency
Common mistakes	Not understanding the importance of risk management practices	Assuming past loss history is the only factor affecting premiums

Real Claim Examples Involving Scheduled Rating (Rating Plan)

Scenario 1: A manufacturing company had high manual rates due to its inherent compensation risks. However, they had robust accident prevention measures in place, regularly trained staff on safety measures, and recorded lower-than-industry-standard accidents. This improved their Scheduled Rating Plan, lowering their premiums.

Scenario 2: A technology company with a low manual rate neglected to implement a security system in their premises. Due to the physical hazard, their Scheduled Rating Plan was adjusted upward, leading to an increase in their insurance premium.

Scenario 3: A retail business faced insurance premium hikes. The analysis revealed the lacking safety conditions and numerous staff accidents were responsible for unfavorable adjustments in their Scheduled Rating Plan. They engaged in a concerted effort to transform their safety practices and witnessed a drop in insurance costs subsequently.

Limitations and Common Mistakes

Assuming that only past claims influence insurance cost and not considering the variety of factors evaluated in the Scheduled Rating Plan.

Mistaking high manual rates for unavoidably high premiums. Robust risk management practices can lead to favorable adjustments in the Scheduled Rating.

Overlooking the physical hazards in the environment which can affect premiums.

Neglecting to properly maintain safety measures after securing a policy as return-to-work programs and safety measures can affect Scheduled Rating Plan.

How to Explain Scheduled Rating (Rating Plan) to Clients

Personal Lines client Think of the Scheduled Rating as a reward or penalty system. If you have good security and safety measures at home, you may pay less for your home insurance. But if you neglect these measures, you can see a rise in your premium.

Small Business owner The Scheduled Rating Plan is a way for insurance companies to customize your insurance cost. They look at several factors like your business operations, any safety measures in place, and the hazards that are present. If these factors are favorable, you may enjoy lower premiums.

CFO or Risk Manager The Scheduled Rating Plan allows insurers to adjust premiums based on your company's unique risks, including your commitment to safety, incident prevention and overall management of hazards. By effective risk management and maintaining good safety conditions, your business has the potential to lower its insurance premiums significantly.