1. Forms
2. CM
3. CM-99-03

What the form is

The CM 99 03 New Business – Premium Adjustment endorsement is designed for newly established businesses where historical data for underwriting and rating is unavailable. Its primary purpose is to allow an initial policy premium to be calculated based on the insured's estimates of their anticipated business operations, such as inventory values or gross sales. The endorsement then stipulates that after a defined period, typically the first six months of the policy, the insured must submit updated information reflecting their actual business operations. The insurance carrier will then use this actual data to re-evaluate the exposure and adjust the premium for the policy period, applying the rates that were in effect when the policy originally began.

Classes of business it applies to

This endorsement is most commonly used in Commercial Inland Marine lines of business when insuring new ventures. Since there's no prior business experience to base premiums on, this form provides a mechanism to fairly price the coverage once actual operational data becomes available. Real-world examples include:

• A newly opened equipment dealership that deals in mobile agricultural or construction equipment (used with CM 00 22 Equipment Dealers Coverage Form). For instance, a start-up company selling tractors and excavators would initially estimate their inventory and sales, with the premium being adjusted after six months of actual operations.
• A new jewelry store (used with CM 00 59 Jewelers Block Coverage Form). A first-time jeweler would estimate their stock values, and this endorsement would allow for premium adjustment once real inventory levels and sales figures are established.
• A new camera and musical instrument dealership (used with CM 00 21 Camera And Musical Instrument Dealers Coverage Form). A new shop selling high-value cameras and musical instruments would have its initial premium based on projected stock, subject to revision based on actuals after the initial six-month period.

Special considerations

• Provisional Premium: The initial premium paid by the new business is considered provisional or an estimate. It's crucial that the insured understands this and is prepared for a potential premium increase or decrease.
• Mandatory Reporting: The insured is required to complete and submit a new application or proposal form detailing their actual business operations (e.g., inventories, sales) within a specified timeframe, often 30 days after the first six months of coverage.
• Premium Adjustment Basis: The premium for the remainder of the policy term (e.g., the final six months of an annual policy) is recalculated based on the actual data provided by the insured.
• Rate Lock: A key feature is that the rates used for this adjustment are those that were in effect on the original policy effective date, not the rates that might be current at the time of adjustment. This protects the insured from rate increases during their initial policy term for the adjustment calculation.
• Consequences of Non-Compliance: Failure to submit the required information in a timely manner could have consequences as outlined in the policy, potentially affecting coverage or leading to a less favorable premium adjustment.

Key information for agents and underwriters

• Pricing: Agents must clearly explain to new business clients that the initial premium is an estimate and that an adjustment will occur. Underwriters will set the initial premium based on reasonable projections but must diarize the policy for the six-month review and adjustment.
• Risk Assessment: This endorsement provides a valuable early checkpoint for underwriters to assess the actual risk profile of a new business. The reported data after six months offers a more concrete basis for understanding the exposures than initial projections.
• Coverage Adequacy: It's important to ensure that the initial limits of insurance are adequate based on the new business's projections, but also to review these limits at the time of premium adjustment if actual values are significantly higher than anticipated to prevent underinsurance.
• Underwriting Guidelines: Underwriters should have a clear internal procedure for managing policies with this endorsement, including tracking submission deadlines for the updated information and the process for recalculating the premium. The initial underwriting file should thoroughly document how the estimated exposures were derived. This endorsement helps mitigate the uncertainty inherent in underwriting brand-new businesses by allowing for an empirical adjustment.