Basically, the retrospective rating system is one of determining premiums after the policy period, but through a variety of changes and refinements it has also become a system of self-rating for relatively large risks. Premiums are based on the loss costs of the insured plus a graded loading expense, and there are minimum and maximum premium limits. The application of the plan is optional and may be used only upon election by the insured and acceptance by the insurer. The retrospective rating plan for workers compensation is offered under a one year plan using endorsement WC 00 05 03 A or under a three year plan using endorsement WC 00 05 04 A. The retrospective rating plan may be applied on an intrastate or interstate basis.

Retrospective rating differs from experience rating in that the latter adjusts manual premiums at the inception of the policy period by comparing losses incurred in prior years with those expected during the current year. On the other hand, retrospective rating adjusts premium at the expiration of the policy period by comparing losses incurred during the current policy year with those expected during the same period (besides, retrospective rating is superimposed upon the premium that results from experience rating). In effect, the intent of retrospective rating is to charge a premium which reflects losses so that, to the extent that the insured controls losses, there is a reward through lower premiums.  Hence, the retrospective rating system is much more responsive to changing hazards and safety activity than experience rating, which uses the experience of two or three policy years.

Any insured (the employer designated in the information page of the policy by the insurer) in a state in which retrospective plans have been adopted is eligible for retrospective rating, provided the compensation insurance, at current approved rates, is expected to produce a certain standard premium. Eligibility for the plan on a one year basis is an estimated standard premium of at least $25,000 per year. For the three year option, eligibility is based on an estimated standard premium for three years of at least $75,000. By definition, the “standard premium” means the premium for the risk determined on the basis of authorized rates, any experience rating modification, loss constants where applicable, and minimum premiums. And note that the estimated standard premium may include other casualty insurance besides workers compensation coverage.

The insured elects to be subject to the plan by notifying the insurer in writing. In this notification, the insured is required to list several items of information. Some of these items are:  the name of the insured, the effective date of the plan, any special conditions affecting the selected plan, and the signature of the insured (partner or officer of the corporation as appropriate).

After the retrospective rating plan has been chosen and put into effect by the insured and the insurer, the premium is computed initially by the insurer using premium and loss data which have been reported. The insurer then notifies the insured and returns premium if the retrospective premium is less than the premium previously paid; conversely, the insured pays any premium greater than that previously paid.

This first computation of retrospective premium is final unless the insured and the insurer do not agree. If there is disagreement, a subsequent computation and adjustment of premium is made by the insurer twelve months after the previous computation using the latest loss data statistics. There are subsequent computations of retrospective premium until both the insured and the insurer agree that the latest computation is the final premium. Once the parties have agreed to the final premium calculation, a revision is not permitted except for clerical error.

Rules and terms used in retrospective rating plans are found in the retrospective rating plan manual issued by the National Council on Compensation Insurance (NCCI). Special rules for some states and rating values used in premium determination are found in the manual's state rate pages.

A retrospective premium is composed of three parts: converted losses plus basic premium multiplied by the tax multiplier (the premium subsequently produced by this three part formula is subject to a maximum and a minimum premium). Converted losses are based on the incurred losses of the risk during the period of the policy. Incurred losses are the actual losses paid and outstanding, interest on judgments, expenses incurred in obtaining third party recoveries, and allocated loss adjustment expenses for employers liability losses. These incurred losses are then multiplied by a loss conversion factor (which covers claim adjustment expenses and the cost of the insurance carrier's claim services) to produce the converted losses.

The basic premium consists of expenses (such as acquisition, general administration, audit, and engineering), along with a provision for possible profit and contingencies. It is determined by multiplying the standard premium by the basic premium factor; this factor is the sum of the expense in basic factor (the expense ratio modified by the loss conversion factor) and the net insurance charge and is determined through various premium computation tables.

The tax multiplier covers licenses, fees, assessments, and taxes that the insurance carrier must pay on the premium that it collects. A tax multiplier is shown on respective state rating pages since it is based on individual state laws and regulations. For an interstate risk, an average of the specified state tax multipliers weighted by the state standard premiums shall be used.

The insured and the insurer may choose that either or both of the following elective premium elements can be included in the process of determining a premium:  excess loss premium and retrospective development premium. Both elements, incidentally, are subject to the tax multiplier mentioned previously.

In order to avoid the effects of a catastrophe loss upon the final retrospective premium paid by the insured, losses that are to be considered in the determination of the premium may be limited to a stipulated amount per accident; this is where the excess loss premium comes into the picture. The carrier is compensated for this limitation of ratable losses by the inclusion in the final premium of an excess loss premium.

The privilege of limiting ratable losses is governed by estimated standard premium. A risk must contemplate a standard premium of at least $100,000 in order to take advantage of this feature, in which case the limit of any loss for rating purposes is set at $25,000 per accident. The loss limitation may be greater than $25,000 for a risk with total standard premium over $100,000 provided, however, that such a higher accident loss limitation does not exceed 50% of the actual standard premium.

A certain amount of flexibility follows from the fact that limits may be changed, added, or eliminated during the rating period upon notice to the organization having jurisdiction; such changes may not be made retroactively, however. Now, the excess loss premium is charged whether or not the insured actually incurs any losses. Thus, where experience has been much better than the insured's original estimate, the possibility should be investigated of removing this limitation. While the insured will have to pay a portion of the excess loss premium for the portion of the rating period that has passed, he is relieved of this burden for the balance of the period. Conversely, where the losses in the first portion of the year (or three year period if the policy is written this way) indicate that the insured's estimate of award per accident is relatively low, it might be wise to change to limiting ratable losses (or increasing the limit per accident). Again, it should be made clear that this cannot be done retroactively,  but the change can be used to ease the situation as respects future losses if the pattern of high awards per accident continues.

Excess loss premium is computed as follows:  standard premium X excess loss factor (shown on state rating pages) X loss conversion factor.

The retrospective development premium anticipates future increases in loss costs and seeks to stabilize premium adjustments. This element is included only in the first three adjustments of the retrospective premium and is computed as follows:  standard premium X retrospective development factor, which is shown on state rating pages, X loss conversion factor. It should be noted that the retrospective development premium is not applicable in some states, for example, Oregon, South Carolina, Louisiana, Missouri, and Minnesota.

As previously mentioned, the retrospective premium is subject to a maximum and a minimum premium. The maximum and minimum premiums as well as the loss conversion factor are determined for each risk by negotiation and agreement between the insured and the insurer. After these elements have been settled, the basic premium factor may be calculated and applied to the standard premium to produce the basic premium.

Also as previously mentioned, rules for retrospective rating plans indicate a standard formula to be used in developing the retrospective premium. The formula is: retrospective premium equals basic premium plus converted losses multiplied by the tax multiplier. If the insurer and insured have so agreed, the figure generated by this particular formula is increased by the excess loss premium and the retrospective development premium.

The rating plans include tables of expense ratios for use by stock and nonstock companies in accordance with the organization adopted by the company. The purpose of the stock and nonstock expense tables is to indicate the amount of premium to cover company expenses, profit or contingencies, but not taxes. The total amount for such expense is determined by multiplying the standard premium of the risk by the factor for that size premium in the table of expense ratios.

Component elements of the retrospective rating formula are obtained either from one of the tables of rating values in the retrospective rating plan manual or from the appropriate state exception page. These tables show minimum premium percentages, basic premium percentages, non-stock adjustment factors, and a single loss conversion factor. The proper table is selected by consulting the state reference chart in the retrospective rating plan section of the manual. The tax multiplier is also obtained from the state exception pages.

Knowledge of the retrospective rating formula and accessibility to the various tables of rating values in the retrospective rating plan manual should be sufficient to enable one to come up with the proper retrospective premium. If more information on retrospective rating is needed, the National Council on Compensation Insurance can be contacted at 901 Peninsula Corporate Circle, Boca Raton, Florida 33487-1362 ; phone 561-893-1000; fax 561-893-1191.

The premium determination for a cancelled policy is controlled by rule X in the basic manual for workers compensation and employers liability insurance, but note that the first determination of retrospective premium is based on incurred losses valued six months after the termination date. If the insurance company cancels the policy before expiration, the pro rata of the earned standard premium is used as the basis for determining the retrospective premium. When insurer cancellation is on the grounds of nonpayment of premium, the appropriate maximum premium percentage is applied to the full year's standard premium in order to determine the maximum retrospective premium for the risk.

If the insured cancels for any reason other than retirement from business, the earned premium is determined as follows: The earned standard premium is computed at short rates. This is the minimum premium (and is what the insured would have paid if the policy had been on a standard basis). Basic premium is the proper percentage of the short rate earned standard premium. Maximum retrospective premium is the stipulated percentage of the pro rata of the standard premium for the time the policy has been in force, extended to the normal expiration date of the policy.

If the insured's reason for canceling the policy is retirement from the insured business, premium is determined as though the cancellation were effected by the insurer. This is so, provided that at the retirement, all work covered by the policy has been completed, all interest in any business covered by the policy has been sold, or the insured has retired from all business covered by the policy.

If a three year retrospective rating policy is cancelled, each 12 month unit within that policy is treated as a separate policy and is cancelled according to rule X in the basic manual for workers comp.

A wrap up construction project is “a construction, erection, or demolition project for which insurance policies have been issued by one or more insurers under the same management to insure two or more legal entities engaged in such a project. The entities insured are limited to the general contractor and subcontractors performing work under contracts let on an ex-insurance basis”. In other words, the contractors working on a project at a single location are wrapped up into one comprehensive insurance program for general liability and workers compensation. It should be noted that the wrap up construction program under the retrospective rating plan manual of NCCI is not applicable in the states of Louisiana, Mississippi, Oklahoma, and Oregon.

The project, usually lasting several years, can be insured under a series of one year policies or a series of three year policies. In either case, the retrospective premium is computed on the basis of the standard premium for the entire duration of the project. Any revision in tax multipliers and excess loss factors shall be applied to policies as of the first anniversary date of the risk.

A wrap up construction project may be treated as a “long term construction project” which simply means a project expected to require more than one year for completion. A long term construction project is eligible for retrospective rating if the standard premium is an average of $75,000 or more per year. For such a project, the retrospective premium is based on the entire period required for the completion of the project.

The article on Workers Comp M.7 offers more information on wrap up plans. See Wrap-Up Plans.