Professional Documents
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Retrospective ratingplan
A rating plan that adjusts
the insureds premium for
the current policy period
based on the insureds
loss experience during the
current period; paid losses
or incurred losses may be
used to determine loss
experience.
5.3
Low
Loss
Severity
Predictability of
Total Losses
Retrospective
Rating Plan
Low
High
Other characteristics of organizations that are typically not suited for retrospective rating plans include these:
Small premiumsize
Wide premium fluctuations
Financial problems
Insurers generally use retrospective rating plans developed by the National
Council on Compensation Insurance (NCCI) for workers compensation and
by the Insurance Services Office (ISO), Inc., for coverages other than workers compensation. Both organizations have developed eligibility rules, pricing
procedures, and retrospective rating premium endorsements that are filed with
and authorized for use by the state insurance departments. When a retrospective rating plan is used, the insurer attaches the appropriate retrospective
rating premium endorsement to the policy. If multiple insurance policies are
subject to the same insurance plan, a retrospective rating premium endorsement is attached toeach.
Premium Determination
As with any insurance plan, the insured organization under a retrospective
rating plan pays a premium to the insurer. The insurer uses the premium to
reimburse claimants for losses and to pay other expenses, such as premium
taxes, residual market loadings, loss adjustment costs, and legal defense fees.
The premium also includes an amount to cover the insurers overhead and
profit.
Experience rating
A rating plan that adjusts
the premium for the current
policy period to recognize
the loss experience of the
insured organization during
past policy periods.
Maximum premium
The most an insured
organization is required to
pay under a retrospective
rating plan, regardless of the
amount of incurred losses.
Minimum premium
For example, the maximum and minimum premiums for a retrospective rating
plan might be $1,000,000 and $200,000, respectively. If during the policy
period the insured organization experiences a total of $1,400,000 in losses
subject to the policys loss limit, the premium is limited to the maximum premium of $1,000,000. If the insured organization experiences no losses during
the policy period, the minimum premium of $200,000 still applies.
Provided the insured organization has a sufficiently large premium, the retrospective rating plan can be designed to cap losses and thereby minimize the
insured organizations retention by using a loss limit. A loss limit is the level
at which each individual accident or occurrence is limited for the purpose of
calculating a retrospective rating insurance premium. The use of a loss limit is
Loss limit
The level at which a loss
occurrence is limited for
the purpose of calculating
a retrospectively rated
premium.