Insurance Services Office (ISO)
The Insurance Services Office, or ISO for short, provides statistical information and advisory services to insurance companies. ISO focuses on property/casualty insurance, including both personal and commercial lines. Its customers include insurers, actuaries, agents and brokers, and government entities, such as fire and building code departments.
ISO has evolved substantially since its inception. ISO was created in 1971 when several rating bureaus consolidated and formed a non-profit association of insurers. By 1993, ISO had reorganized as a for-profit independent corporation. In 2008, it created a new company called Verisk. ISO went public the following year and became a wholly-owned subsidiary of Verisk. As a subsidiary of a public company, ISO is no longer controlled by insurers.
Need for ISO
Insurers develop rates based on projections of future losses. They obtain data about past losses, and then use probabilities to predict whether future losses will be higher, lower or the same as those that occurred previously. Losses become more predictable as the amount of data increases. That is, insurers can predict future losses more accurately when they have a large amount of loss data to work with.
While some insurers may be able to predict losses accurately using their own loss data, most cannot. A majority of insurers are relatively small. They can't generate enough data on their own to make accurate predictions about future claims. Thus, many insurers rely on ISO for data.
ISO collects loss data from the insurers that purchase its products and services. These insurers are called ISO subscribers. Each year, subscribers report their premiums, losses, and expenses to ISO. The insurers categorize the data by line of business (type of coverage). For instance, an insurer might provide separate data for commercial property, auto physical damage, and general liability.
ISO processes all of the data it collects and then sells it back to insurers. Insurers use this data to assess the profitability of each type of insurance. They also look for loss trends. Losses may be increasing for some types of insurance and decreasing for others.
In the past, ISO utilized the premium and loss data it collected from insurers to publish rates. ISO's subscribers used those rates to calculate premiums. Nowadays, ISO mostly publishes loss costs rather than rates. Insurers determine their own rates by using the loss cost data as a starting point. An insurer might calculate a rate by beginning with the loss cost and adding charges for administrative expenses, taxes, and profit.
One important service ISO provides for insurers is policy writing. Creating new policy forms is a costly, time-consuming task. Insurers can avoid this task by using pre-printed ISO forms. They can also avoid some of the risks associated with policy writing. Policies drafted by insurers may be interpreted differently by the courts than the insurers intended. ISO forms generally present fewer risks since much of the policy language has already been analyzed by the courts.
Many of ISO's policy forms are used as the industry standard. These forms serve as benchmarks for analyzing and comparing policies developed by individual insurers. For example, the ISO Commercial General Liability Coverage Form is the industry standard for general liability coverage. Some insurers have developed policy forms that are broader than the ISO form. In marketing materials, these insurers often highlight areas in which their form is broader than the ISO standard form.
Some insurers issue insurance policies using ISO forms and endorsements "as is" (without any alterations). Other insurers use ISO language as a starting point for developing their own policy forms. Many forms and endorsements found in the marketplace contain a combination of standard ISO language and insurers' proprietary wording.
Rating and Underwriting Rules
One essential product ISO provides to insurers is the Commercial Lines Manual. This publication outlines rules and instructions for underwriting and rating the coverages provided by ISO policy forms. It contains separate sections for commercial auto, general liability, and commercial property insurance.
The Commercial Lines Manual is utilized by both insurance underwriters, and insurance agents and brokers. It explains how the various ISO forms are to be used. For example, the Commercial Auto section describes the types of vehicles that may be covered under a business auto policy. The manual contains classification tables, rating rules, territory descriptions and instructions for calculating premiums. It also indicates when specific endorsements should be attached to a policy to add, remove or modify coverage.
ISO offers many services besides those outlined above. Here are examples.
- Financial Reporting ISO provides products insurers can use to file their annual financial reports to state insurance regulators.
- Workers Compensation Reporting ISO offers tools that facilitate the process of filing rates, rules, and forms to state workers compensation authorities.
- Property Inspections ISO performs physical inspections of buildings that are subject to specific rating.
- Fraud Detection ISO collects claims data from many insurers and stores it in a central database. ISO subscribers can use the database to detect insurance fraud that is occurring across the industry.