Casualty Actuarial Society (CAS) Practice Exam

Using payroll as a general liability premium base is particularly relevant for contracting or servicing operations. This is because these types of businesses typically have employees who are directly involved in tasks that can lead to liability claims, such as completing contracts or providing services on behalf of clients. Since the risk associated generally correlates with the number of employees and the total payroll, using payroll as a premium base allows insurers to more accurately assess and charge for the risk associated with these operations.

In contrast, manufacturing operations often rely on other factors such as production volume or sales, while retail operations might use sales or inventory levels due to the nature of their business. Wholesale operations typically do not have the same direct exposure to liability claims as contracting businesses do, as they primarily handle the distribution of goods rather than providing services. Therefore, using payroll for contracting or servicing operations helps better match the premium to the actual risk presented by the workforce involved in those activities.