



RETROSPECTIVE RATING PLANS
Retrospective rating focuses on the application of a basic
concept. The insured provides the funds, which the insurer uses to pay claims
and expenses. If the funds do not
cover the costs, the insured has to pay an additional premium subject to the
maximum premium. If there are excess
funds, the insured is given a refund subject to a minimum premium. By
example: 


Basic Premium Minimum Premium Maximum Premium 
100% 
$190,000
95,000 285,000 

In other words; if, losses and expenses are equal to
$199,253 or more, the maximum premium charge of $295,000 would be fully
earned; if losses and expenses are $34,751 or less, the minimum premium of
$95,000 would be fully earned. Based on a Basic Premium charge of
$190,000, the insured would be billed a maximum of $95,000 additional premium
if losses exceeded $199,253, based on the loss and expense conversion factor
of a standard policy Retro Program, and a return of premium of $95,000 if
losses were $34,751 or less. For an insured that believes his
business is far better than the “Average” Industry Risk Class experience, and
that his business is charged rates far too high, that business owner could
assume the risk associated with losses greater than the average, and end up
paying more than the standard rate, OR assume more risk and benefit
with a refund of almost fifty percent of the standard rate. There are many variations to the above Retrospective
Rating Plans. The above is the
simplest example of how it works. The
formula and factors refund and charge, up to the maximum and as low as the
minimum based on actual losses. 


F. Darrell Lindsey State Approved Captive/RRG Manager 


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