Retro Policies

In the example below, an error in the calculation of the basic premium (the premium if there are no losses during the policy period) could cost the company $125,000 in workers' compensation premium - per year!

January 1, 2008

You agree to purchase a retro policy from an insurance company with the minimum and maximum premiums below. The estimated premium is the standard premium (which can also have errors due to misclassification or e-mod issues. These calculations are discussed elsewhere.

Your premium is calculated by the insurance company as follows:

 

 

 

 

 

 

 

Expressed
as a
Percentage of Estimated
Premium

Expressed
in
Dollars

 

 

 

Minimum Premium
(basic premium)

50%

250,000

 

 

 

Estimated Premium

100%

500,000

 

 

 

Maximum Premium

200%

1,000,000

 

 

 

 

 

 

 

 

 

You work out a payment plan with your insurance company to pay the $500,000 estimated workers' compensation premium during the year.

 

 

 

 

 

 

July 1, 2009

Six months after the end of the policy period, no losses have been reported on your policy. The insurance company agrees that the minimum premium applies and calculate the final premium as follows.

 

 

 

 

 

 

 

Expressed
as a
Percentage of Estimated
Premium

Expressed
in
Dollars

 

 

 

Minimum Premium
(basic premium)

50%

250,000

 

 

 

Estimated Premium

100%

500,000

 

 

 

Maximum Premium

200%

1,000,000

 

 

 

Estimated Premium ($500,000) minus Minimum Premium ($250,000) equals premium refund ($250,000).

 

 

 

 

 

 

August 1, 2009

Your insurance company sends you a premium refund for the difference - $250,000.

After a thorough review of the retro rating formula, you determine that the minimum premium should be 25% of estimated premium and calculate the final premium as follows.

 

 

 

 

 

 

 

Expressed
as a
Percentage of Estimated
Premium

Expressed
in
Dollars

 

 

 

Minimum Premium
(basic premium)

25%

125,000

 

 

 

Estimated Premium

100%

500,000

 

 

 

Maximum Premium

200%

1,000,000

 

 

 

Estimated Premium ($500,000) minus Minimum Premium ($125,000) equals premium refund ($375,000).

 

 

 

 

 

 

Your premium refund should have been $375,000 - $125,000 more than the refund offered by the insurance company.

Notes:

The example above was simplified to demonstrarte the effect of retro rating errors, and does not include the effects of misclassification, premium discounts, or any other rating program generating premium credits or debits.

Please contact Bill Hager at 561-306-5072 or bhager@expertinsurancewitness.com for more information.


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