Definition of retrospectively qualified insurance

What is retrospective rated insurance?

Retrospective rated insurance is an insurance policy with a premium that is adjusted based on losses experienced by the insured company, rather than based on industry-wide loss experience. This method takes actual losses to derive a premium that more accurately reflects the insured’s loss experience. An initial premium is charged and adjustments are made periodically after the policy has expired.

Key takeaways

  • A retroactively rated insurance policy adjusts a policy’s premium based on actual losses during the policy period.
  • This insurance method is in contrast to industry-wide loss-based premiums.
  • An insured entity can benefit or be harmed by retroactively rated insurance, as premiums go up and down depending on how many losses they incur.
  • Companies have an incentive to implement more security and loss controls to avoid an increase in premiums.
  • Workers’ compensation, general liability, and automobile liability are some areas where retroactively rated insurance applies well.
  • The premium adjustment for retroactively rated insurance is calculated differently than for experience-rated insurance.

Understanding retrospective rated insurance

A retroactively rated insurance policy typically begins with premiums based on expected losses. After the policy expires, the premium is adjusted to reflect the actual losses incurred during the term of the policy.

This method serves as an incentive for the insured company to control its losses, as the price of the policy is likely to decrease if the insured can limit exposure to risk. The premium can be adjusted within a certain range of values, and the policy premium is subject to a minimum and maximum amount.

When evaluating insurance coverage options, companies weigh the risk they are willing to take against the amount of premium they are willing to pay. The higher the risk the company wants to cover, the higher its premium. In some cases, companies may want to retain more risk, but may want the option of using a retroactively rated plan that adjusts the premium over time.

Businesses that purchase retroactively rated insurance policies can use them to cover a variety of risks, from general liability and workers’ compensation to property and crime. Retrospective plans can cover multiple risks under the same policy, rather than requiring the insured to purchase a new policy to cover each type of risk. The types of risks covered tend to have a low probability of being catastrophic, although losses can occur frequently. These high loss frequency and low loss severity factors make losses highly predictable.

Retrospective Rating Insurance vs. Experience Rating Insurance

A retrospectively rated insurance policy adjusts premiums differently than experience rated insurance. An experience rating implies an adjustment based on previous policy periods, while a retrospective rating implies an adjustment based on the current policy period. While hindsight policies may consider past losses, current losses carry more weight.

An experience rating is most commonly associated with workers’ compensation insurance and is used to calculate the experience modifying factor. Insurance companies monitor claims and losses arising from the policies they write. This assessment includes determining whether certain classes of policyholders are more prone to claims and therefore riskier to insure.

Not all companies are suitable for retroactively rated insurance. Companies that have small premiums or premiums that change substantially from one policy period to the next, or that have unstable finances, are not suitable.

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Mark Holland

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