The Step Factor: Understanding Rate Increases on a Claims‑Made Policy

One of the most common questions we hear from our policyholders is about the rate increase on a claims-made policy, also known as the “claims-made step factor.” Claims‑made policies are priced on a step‑rated schedule. The premium is lowest the first year of a new policy, because a new policy carries limited exposure to prior claims. The premium increases as the exposure to risk increases; usually by the fourth or fifth year of the claims-made policy, the exposure levels off and pricing stabilizes. This approach reflects industry best practices and ensures long‑term stability for policyholders. 

Why does my claims-made policy premium increase over time?
Claims-made policies are priced on a step-rated schedule, meaning premiums typically increase over the first several years of coverage as the policy matures. 

How does the claims-made step factor work?
Premiums are generally lowest in the first year of a new claims-made policy because the policy carries limited exposure to prior claims. As time passes, the exposure to risk increases, and premiums adjust accordingly.

• Premiums typically increase over the first 3-4 years of coverage.

• The policy reaches a fully mature rate in year 4 or 5.

• By the fifth year, exposure levels off and pricing typically stabilizes.

Why is the first year premium lower?
The premium is lowest during the first year because a new claims-made policy has less historical exposure. As additional years of coverage accumulate, the potential for claims tied to prior acts increases, which is reflected in the step-rated premium adjustments. 

When does a claims-made policy respond to a claim?
A claims-made policy will respond to a claim as long as:

• The policy is active, and

• The claim is reported after the applicable retroactive date, or

• Tail coverage was purchased when the policy expired or was cancelled

This structure allows coverage to apply even if the underlying incident occurred in the past, provided it meets these conditions. 

What is tail coverage?
Tail coverage (also called an extended reporting endorsement) allows claims to be reported after a claims-made policy has expired or been cancelled.

• Tail coverage requires an additional premium, generally calculated as a percentage of the mature rate.

• Under certain circumstances, tail coverage may be available at no additional charge for PICA insureds.

Details and eligibility vary, so please refer to your policy.

Are there other factors that impact premium cost?

Yes, in addition to the claims‑made step factor, premiums may also be influenced by other pricing and underwriting factors that are reviewed periodically. These can include:

• Base rate changes filed for a specific state

• Location factors that reflect regional risk differences

• Individual risk profile changes, based on practice characteristics and exposure

Premiums are priced using many factors to ensure rates remain sustainable over the long term. Even when there are no losses or changes to coverage, adjustments to one or more of these elements may result in a premium change at renewal.

What is the difference between claims-made and occurrence policies?

Watch this video to learn more about the differences between a claims-made policy and an occurrence policy.