Retrospective (Retro) rating insurance plans can have many advantages for employers. They are a hybrid risk financing plan in which an organization buys insurance subject to a rating formula that adjusts the premium after the end of the policy period based on the insured organization’s actual losses during the policy period. Employers should consider state eligibility requirements, premium size and risk tolerance when contemplating the move to a retro. The majority of states require $100,000 in countrywide premium to be eligible for a “statutory” retro program. However, some states do offer a Large Risk Loss Rating Option (LRARO) which allows the insurer the flexibility to negotiate the retro terms to find a solution that fits the insured’s budget and risk tolerance. Below we will identify the components that make up a retro rating plan as well as the benefits of having this type of plan.
Components of a retrospective rating plan
Standard Premium: This is calculated using the state designated rating bureau’s rating classifications, applying them to an insured organization’s estimated exposures for the policy period and allowing for various adjustments.
Basic Premium: Insurance company’s acquisition expenses including administrative costs, overhead and profit, and the insurance charge.
Maximum Premium: The most premium the insured will pay under the plan regardless of the losses incurred.
Minimum Premium: The least amount of premium the insured will pay under the plan even if there are no losses.
Loss Conversion Factor: Percentage applied to the limited incurred losses to allow a carrier to collect a charge for their loss adjustment expense (LAE) not included as part of loss. It captures unallocated loss adjustment for all lines.
Tax Multiplier: Is a % factor representing various taxes and assessments in each state.
How do you calculate a retro rating plan?
(Basic Premium + Converted Losses) x Tax Multiplier Retros are adjusted annually until all claims are paid or the maximum is reached.
Benefits of a retro rating plan
Benefit immediately from premium reductions based upon current losses
Great alternative to fixed cost
Flexibility in plan design
Fairly priced premium reflects claim costs
Encourages continual vigilance on loss control and return to work
Many factors need to be considered when determining if a retro is right for your client including the overall claim experience, stability of their organization and financial stability. A thorough examination of these factors needs to be conducted before a final decision is made. Understanding these plans gives brokers an opportunity to differentiate themselves to price driven buyers and add value to their clients. For more information on PMA’s insurance services, please visit our website at https://www.pmacompanies.com/insurance.html.
Jeanne Consiglio is the Territory Marketing Manager for the New England insurance operations of PMA Companies. With more than 25 years of experience in the commercial insurance field, she is responsible for expanding PMA's presence and generating profitable business growth by working closely with brokers and agents throughout New England.