Module 5 Flashcards
Retrospective Rating plan
rating plan that adjusts premium for current policy period based on the insured’s loss experience during the current period
Experience Rating
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
Maximum premium
the most an insured organization is required to pay under a retrospective rating plan, regardless of the amount of incurred losses
minimum premium
the least an insured org is required to pay under a rating plan, regardless of incurred losses
loss limit
the level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium
describe the lines of business that are typically covered under retrospective rating plans
loses arising from liability loss exposures:
Workers comp
auto liability
general liability
Also:
auto physical damage
crime
glass
Contrast experience rating with retrospective rating
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
identify the costs that are incorporated into a retrospective rating plan premium
retained losses
insurer overhead and profit
residual market loadings
premium taxes
risk transfer premium
Basic Premium
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
Insurance Charge
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
converted loss
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
loss conversion factor
a factor applied to incurred losses so that the converted losses reflect unallocated loss adjustmetn expenses
excess loss premium
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
tax multiplier
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
Explain what standard premium represents in the calculation of retrospective rating plan premium
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)
describe the significant of a high loss conversion factor in relation to calculating a retrospective rating plan premium
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
describe the process of adjusting premium in a retrospective premium plan over time
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
Incrurred loss retrospective rating plan
insured pays deposit premium during policy period
insurer adjusts at end of policy period based on actual INCURRED losses
paid loss retrospective rating plan
insured pays deposit premium
additional payment usually monthly to reimburse insurer for losses as they are PAID
distinguish between an incurred loss retrospective rating plan and a paid loss retrospective rating plan
Incurred loss premium plan = on the basis of actual INCURRED losses
Paid loss retrospective rating plan - on basis of PAID losses
describe the advantage to an insured organization of using a paid loss retrospective rating plan rather than an incurred loss restrospective rating plan
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
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
Decision has to be made carefully as insurer is compensated in form of up front premium for PAID loss retrospective rating plan.
administrative duties of an insurer under a retrospective rating plan
adjusting losses
making necessary filings with reg authorities
paying premium taxes and market loadings
administrative duties of an insured under a retrospective rating plan
making premium payments
arranging for required security (letters of credit) to guarantee future payment
Explain why many insurers using paid loss retrospective rating plan require the insured to provide collateral
guarantee future payment will be made
Identify the financial accounting issues an insured considers when using a retrospective rating plan
.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
identify three possible disadvantages of a restorspective rating plan compared with a guaranteed cost plan
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.
identify a potential objection to the insurer’s premium adjustment process under a retrospective rating plan
insurer may not diligently adjust losses when it knows the insured org is retaining them, resulting in higher than necessary loss payments
Tow advantages of retrospective rating plan
long run cost tends to be lwoer than cost of transfer
encourages risk control
