As big data takes root within the insurance industry, the classification assigned to a business is often the key component of acceptability and pricing. In other words, what a business is labeled as impacts whether or not they can get insurance and how expensive it will be. With a limited number of standard classifications and exciting new businesses established daily, oftentimes a business will be classified based on analogy – what classification does it most resemble? This process often gives a skilled agent the opportunity to secure a favorable fit for an unusual business.
Several years ago, I had the opportunity to provide Workers’ Compensation coverage to a company in the San Francisco Bay Area that manufactures solid rocket fuel – that’s right, rocket fuel. Visiting the facility and meeting the management team was very interesting for me as I love everything about outer space.
When the CFO reviewed their current policy with me, we all had a good laugh, and I had to commend their current agent with some of the most creative effort to put a positive spin on what’s considered a high hazard business. One thing I need to share with you is that a major component of the rocket fuel was paraffin or wax. Based on this, their agent managed to push this rocket fuel manufacturer through the underwriting process as a candle manufacturer!
I pride myself on knowing my way around the many standard Workers’ Compensation classifications, however, I don’t think I could have convinced an underwriter that the hazards of the workplace for a rocket fuel manufacturer are the same as a candle manufacturer.
There is a Rocket Fuel Manufacturing classification, and as I noted above, most underwriters found the candle classification unacceptable. In this case, however, there is an interesting twist. Although there were very few underwriters willing to provide a quote, the rate for Rocket Fuel Manufacturing is actually lower than Candle Manufacturing. How can this be, you ask?
A Workers’ Compensation rate is a function of two primary sets of data. First, the historical claim activity for the classification, and second, the average wage level for the classification. Since Workers’ Compensation premium is based on employee payroll, a classification with a relatively high wage level will push the rate down. In addition, the safety culture of a rocket fuel manufacturer is crucial and keeps the claim activity low.
Next time you see a solid rocket motor launch something into outer space you just might hear someone say, “Light up that candle!”