Retrospective Premium Endorsement - One Year Plan - Standard Premium Basis (IL 09 00)
The IL 09 00 Retrospective Premium Endorsement - One Year Plan - Standard Premium Basis is an endorsement used in commercial insurance policies. Its primary purpose is to introduce a retrospective rating plan for a one-year policy period. Under this plan, the final premium paid by the insured is not fixed at the beginning of the policy but is adjusted after the policy period ends based on the actual losses incurred by the insured during that year. This endorsement outlines the specific formula and procedures for calculating the final premium, which will be subject to pre-agreed minimum and maximum premium amounts. The "Standard Premium Basis" indicates that the initial premium charged is based on standard rates before any retrospective adjustments.
Classes of Business It Applies To
This endorsement is typically used for larger commercial clients who have a significant premium volume and a desire to have their insurance costs more directly reflect their own loss experience. It's commonly seen in lines of business where loss frequency and severity can vary significantly from one insured to another, and where the insured has a strong commitment to risk management and loss control. Real-world examples include:
- Workers' Compensation: Companies in industries with historically high workers' compensation claims, such as manufacturing, construction, or transportation, may use this plan to benefit from their safety programs. If they successfully reduce workplace injuries, their final premium will be lower.
- General Liability: Businesses with significant public exposure, like large retail operations, hospitality businesses, or real estate owners, might opt for a retro plan. Effective safety measures and claims management can lead to premium savings.
- Commercial Auto Liability: Companies with large fleets of vehicles (e.g., trucking companies, delivery services) can utilize this endorsement. A good driving safety record and accident management can directly impact their final insurance cost.
Retrospective rating plans can cover multiple risks under the same policy. This endorsement is generally suitable for businesses with predictable, high-frequency, low-severity losses.
Special Considerations
Several important factors should be considered before implementing the IL 09 00:
- Mutual Agreement: Both the insurer and the insured must agree to a retrospective rating plan.
- Cash Flow Impact: The final premium is unknown until after the policy period and loss evaluation, which can take months or even years for all claims to fully develop and be reported. This can create uncertainty in budgeting for insurance costs. The insured might receive a return premium if losses are low or face an additional premium if losses are high.
- Loss Sensitivity: The insured's premium is directly tied to their loss experience. While this incentivizes loss control, it also means that a year with unexpectedly high losses can result in a significantly higher premium, up to the agreed maximum.
- Complexity: Retrospective rating plans are more complex than guaranteed cost policies. Understanding the formula, including the basic premium, loss conversion factor, and tax multiplier, is crucial.
- Loss Development: The calculation of "incurred losses" includes amounts paid and estimates for future payments (reserves). The accuracy of these reserves can impact the timing and amount of premium adjustments.
- Cancellation: If the policy is canceled by the insured, the standard premium may be subject to a short-rate penalty, which could also impact the minimum retrospective premium due.
For example, a manufacturing company that implements a new safety training program and invests in machine guarding could see a substantial reduction in its workers' compensation premium under this plan if these measures lead to fewer and less severe claims. Conversely, if an unforeseen catastrophic event occurs, their premium could increase significantly, up to the policy's maximum limit.
Key Information for Agents and Underwriters
Agents and underwriters need to be aware of the following when dealing with the IL 09 00:
- Risk Appetite: This endorsement is best suited for insureds who are comfortable with a degree of risk and have robust safety and loss control programs in place. It's not ideal for clients who prefer predictable, fixed insurance costs.
- Premium Size: Retrospective rating is generally considered for larger risks, often with annual premiums exceeding certain thresholds (e.g., $100,000+), as the potential savings and the administrative costs make more sense at that level.
- Underwriting Data: A thorough analysis of the insured's past loss history, financial stability, and commitment to risk management is critical. Underwriters will assess the predictability of the insured's losses.
- Setting Parameters: Careful consideration must be given to negotiating the minimum and maximum premium factors, the basic premium factor, and the loss conversion factor. These elements define the range of potential premium outcomes.
- Claims Management: The effectiveness of the insurer's (or a third-party administrator's) claims handling significantly impacts the outcome of a retrospective plan. Efficient claims management can help control incurred losses.
- Standard Premium Calculation: It's important to accurately determine the "standard premium," as this is the base upon which the retrospective calculations (including minimum and maximum premiums) are made. The standard premium generally excludes elements like premium discounts and expense constants.
- Combining Policies: This endorsement allows for the retrospective rating plan premium to be calculated based on this policy combined with other policies listed in the schedule. If multiple insureds are covered, the premium is determined for all insureds combined.
An agent proposing this endorsement should clearly explain the potential upsides (premium savings for good loss experience) and downsides (additional premium for poor loss experience) to the client. Underwriters need to be confident in the insured's ability and willingness to manage their risks effectively.