Retrospective rating

Category: Pricing & rating · Reviewed by Taylor Watts, Broker · New Business · Last reviewed

Retrospective rating

Retrospective rating (also “retro” plans, “swing plans”) sets the final premium for a policy period based on the actual losses incurred during that period, subject to defined minimum and maximum premium parameters. It transfers a substantial portion of the underwriting risk back to the insured in exchange for premium efficiency.

Formula

Final premium = (Basic premium + Converted losses × Loss conversion factor) × Tax multiplier

bounded between agreed Minimum and Maximum premiums.

Components

• Basic premium — insurer’s expense and net cost of insurance regardless of losses.
• Converted losses — actual losses × loss limit factor (capping individual large losses).
• Loss conversion factor — multiplier for unallocated loss adjustment expense (ULAE).
• Tax multiplier — for premium-based taxes.
• Min/Max premium — the swing limits.

Use cases

• US workers’ compensation for very large employers.
• Large commercial general liability programmes.
• Captive-fronted programmes where the captive assumes the variable portion.
• Long-term programmes for clients with predictable, controllable exposures.

UK relevance

Retro plans in the strict US-styled sense are rare in the UK market. Their economic equivalent — premium-sharing, loss-sharing or profit-commission features — appears in:

• Aggregate stop-loss programmes.
• Captive fronting arrangements.
• Long-term agreements (LTAs) with profit commission clauses.
• Self-insured retentions with paid-loss conversion.

References

• CAS. Workers Compensation Retrospective Rating Plan.
• Swiss Re publications on alternative risk transfer.

Cross-references

• Insurance pricing
• Experience rating
• Loss ratio rating

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