Rating By Layer of Insurance

One of the peculiarities of property and casualty insurance is that losses vary by size depending upon the severity of the accident, occurrence, or illness. The insured amount, or limit of liability, is a maximum benefit and is paid only in the event of a very serious or total loss. For the most part, losses are settled for less than the maximum benefit. Because of this "partial loss" feature, an increase or decrease in the insured amount for any one risk does not necessitate a proportional change in the premium charge. This nonproportional or non-linear relationship gives rise to many rating complications, especially when it is coupled with a limitation on the amount of coverage afforded.