ILF (Increased Limit Factors) for Liability Insurance
How increased limit factors are calculated and used in liability insurance pricing.
What Are Increased Limit Factors?
Increased Limit Factors (ILFs) express the relative cost of providing higher liability limits compared to a base limit (typically $100,000 per occurrence). An ILF of 2.0 at the $1 million limit means that coverage at that limit is expected to cost twice the base limit premium. ILFs are derived from the size-of-loss distribution, which describes the probability and severity of claims at different dollar amounts.
Calculating ILFs
The calculation involves fitting a severity distribution (commonly lognormal, Pareto, or mixed exponential) to historical claims data. The expected limited average severity at each limit is divided by the expected limited average severity at the base limit. The resulting pure premium ILFs are then adjusted for loss adjustment expenses (which tend to increase with claim size), risk loads, and expense considerations. ILFs generally increase at a decreasing rate because the probability of extremely large claims declines at higher layers. ISO publishes standard ILF tables for major liability lines.