NAIC SSAP 66

Question 1

What is a retrospectively rated contract?

Answer 1

• a contract where the final premium is based on the loss experience of the policy
• includes loss development after expiration
• final premium is determined by a formula written in to the policy or by law
• considered “loss-sensitive” contract
• premium adjustments due “to” or “from” insurers are considered to be admitted assets

Question 2

Ways of estimating retrospective premium adjustments

Answer 2

1. apply the historical ratio of (retrospective rated developments)/(earned standard premium) to the premium for the policy being rated
2. for each risk, compare known to anticipated loss development (including IBNR) to estimate return or additional premium earned at that point in time

Question 3

Accounting treatment of retrospective premium

Answer 3

accrued additional retrospective premium
* record as a receivable
* with a corresponding entry in written premium or an adjustment to earned premium

accrued return retrospective premium
* record as a liability (as a change in unearned premium)
* with a corresponding entry in written premium or an adjustment to earned premium

Question 4

Required financial statement disclosures regarding retrospectively rated policies

Answer 4

• estimation method for premium adjustments
• accounting method for premium adjustments (whether through written premium or an adjustment to earned premium)
• amount & proportion of net premiums subject to retrospective adjustments (a high proportion increases uncertainty of final costs)
• calculation of non-admitted retrospective premium