# August 4, 2016

## Workers Compensation Retrospective Rating Plan

Using a simplified definition, a retrospective rating plan (retro) is a pricing plan available in which your workers compensation premium is developed, in its final form, by the losses sustained during the policy period.

First let’s go over the components of a retro:

Maximum Premium: This factor represents the percentage over and above the standard premium, which can be collected in the event of adverse loss performance during the policy period. Example: A \$50,000 policy with a 1.25 (125%) maximum could potentially be billed \$62,500 if you had a high claims amount. This factor is part of the negotiating your agent should do on your behalf. It is subjective and set by the underwriter.

Minimum Premium: This factor represents the ultimate return to the insured in the event you had no losses. Example: The same \$50,000 policy with a.60 (60%) minimum premium would pay only \$30,000 in premium if you had no losses. This factor is in direct correlation with the maximum. The higher the maximum, the lower the minimum and visa versa. In other words, take more risk get more reward, take less risk get less reward.

Loss Conversion: This factor represents the cost the insurance company is going to charge you to administer the claims you incur. Example: The retro is issued with a 1.10 (10%) loss conversion factor and you incur a \$10,000 claim. The insurance carrier will calculate this claim as \$11,000 (\$10,000 x 1.10 = \$11,000). This factor is also negotiable and set by the underwriter. This factor has a direct correlation with the minimum. The higher the loss conversation factor the lower the minimum premium and visa versa.

Tax Multiplier: Because retro’s deviate from the standard policy pricing, which has the premium taxes the insurance company pays included in the premium the tax multiplier is shown separately on the retro. This factor is set by the state and is not negotiable.

Now that we have covered what the “factors” represent, here is an example of how a retro is calculated. In this example we will use a \$100,000 standard premium and \$40,000 in losses the following factors (The factors vary by insurance company these being used are only an example):

• Maximum: 1.25
• Minimum.50
• Loss Conversion: 1.10
• Tax Multiplier: 1.07