Module 5

Question 1

Retrospective Rating plan

Answer 1

rating plan that adjusts premium for current policy period based on the insured’s loss experience during the current period

Question 2

Experience Rating

Answer 2

a rating plan that adjustes the premium for the current policy period to recognize the loss experience of the insured org during past policy periods

Question 3

Maximum premium

Answer 3

the most an insured organization is required to pay under a retrospective rating plan, regardless of the amount of incurred losses

Question 4

minimum premium

Answer 4

the least an insured org is required to pay under a rating plan, regardless of incurred losses

Question 5

loss limit

Answer 5

the level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium

Question 6

describe the lines of business that are typically covered under retrospective rating plans

Answer 6

loses arising from liability loss exposures:

Workers comp

auto liability

general liability

Also:

auto physical damage

crime

glass

Question 7

Contrast experience rating with retrospective rating

Answer 7

experience rating recognizes loss experience during past policy periods

retrospective adjust premiums for current experience during current policy period.

Experience is reflected in standard premium when calculating retrospective premium

Question 8

identify the costs that are incorporated into a retrospective rating plan premium

Answer 8

retained losses

insurer overhead and profit

residual market loadings

premium taxes

risk transfer premium

Question 9

Basic Premium

Answer 9

fixed cost element of the retrspective rating formula that includes:

acquisition expenses

loss control services

premium audit

general admin of the insurance

adjustemtn for limiting the retrospective premium to a stated maxiumum

provision for the insurer’s profits and contingencies

Question 10

Insurance Charge

Answer 10

a component of the basic premium that provides the insurer with compensation for the risk that the insurance premium may be higher than the maxium premium or lower than the minimum premium

Question 11

converted loss

Answer 11

an element of the retrospective rating forrmula that includes the actual losses incurred increased by a factor (loss conversion factor ) that reflects loss adjustment expenses

Question 12

loss conversion factor

Answer 12

a factor applied to incurred losses so that the converted losses reflect unallocated loss adjustmetn expenses

Question 13

excess loss premium

Answer 13

a component of the retrospective rating insurance premium formula that compensates the insurer for the risk that an individual loss will exceed the loss limit

Question 14

tax multiplier

Answer 14

element of retrospective rating premium formula that covers the insurer’s cost for state premium taxes, licence fees, insurance org assessments and residual market loadings that the insurer must pay on all written and collected premium

Question 15

Explain what standard premium represents in the calculation of retrospective rating plan premium

Answer 15

the amount an insured org pays for insurance coverage under a guaranteed cost insurance plan.

reflects a combination of industry wide loss experience for a class of orgs (exposure rating) and the insured’s actual loss experience (experience rating)

Question 16

describe the significant of a high loss conversion factor in relation to calculating a retrospective rating plan premium

Answer 16

implies that there is a high cost for the insurer to provide claims services for which the cost is not allocated to individual claims.

more expensive for the insured organization

Question 17

describe the process of adjusting premium in a retrospective premium plan over time

Answer 17

standard premium estimated

at end of policy insurer adjusts standard premium based on actual exposures for the period by applying retrospective rating premium formula

subsequent adjustments are made, usually annually

futher billing if increased losses from that period

premium retunred if losses decrease

Question 18

Incrurred loss retrospective rating plan

Answer 18

insured pays deposit premium during policy period

insurer adjusts at end of policy period based on actual INCURRED losses

Question 19

paid loss retrospective rating plan

Answer 19

insured pays deposit premium

additional payment usually monthly to reimburse insurer for losses as they are PAID

Question 20

distinguish between an incurred loss retrospective rating plan and a paid loss retrospective rating plan

Answer 20

Incurred loss premium plan = on the basis of actual INCURRED losses

Paid loss retrospective rating plan - on basis of PAID losses

Question 21

describe the advantage to an insured organization of using a paid loss retrospective rating plan rather than an incurred loss restrospective rating plan

Answer 21

insured orgfanzation benefits from cash flow available on funds it retains

incurred retrespective rating plan generally has a smaller deposit premium as insured paying based on incurred losses

Question 22

Explain why an org might favor an incurred loss retrospective rating plan over a paid loss retrospective rating plan, despite the advantage discussed in the preceding question

Answer 22

Decision has to be made carefully as insurer is compensated in form of up front premium for PAID loss retrospective rating plan.

Question 23

administrative duties of an insurer under a retrospective rating plan

Answer 23

adjusting losses

making necessary filings with reg authorities

paying premium taxes and market loadings

Question 24

administrative duties of an insured under a retrospective rating plan

Answer 24

making premium payments

arranging for required security (letters of credit) to guarantee future payment

Question 25

Explain why many insurers using paid loss retrospective rating plan require the insured to provide collateral

Answer 25

guarantee future payment will be made

Question 26

Identify the financial accounting issues an insured considers when using a retrospective rating plan

Answer 26

.future premium payments should be posted as a liability on balance sheet and charged as an expense on income statement any additional premium for IBNR losses should be posted as a liability on balance sheet and as an expense on income statement

Question 27

identify three possible disadvantages of a restorspective rating plan compared with a guaranteed cost plan

Answer 27

if not well designed can make financial plannign difficult if insurer sets unrealistically high reserves for retained portion of the losses the insured will pay premium based on inflated loss resreve figures = reduction in cash flow retained losses are initiailly paid as premium so losses must be increasesds ot at the insurer can pay premium taxes and residual market loadings.

Question 28

identify a potential objection to the insurer's premium adjustment process under a retrospective rating plan

Answer 28

insurer may not diligently adjust losses when it knows the insured org is retaining them, resulting in higher than necessary loss payments

Question 29

Tow advantages of retrospective rating plan

Answer 29

long run cost tends to be lwoer than cost of transfer encourages risk control