What the form is
The IL 09 19 Retrospective Premium Endorsement - Three Year Plan - Multiple Lines is an endorsement that modifies an insurance policy to establish a retrospective premium rating plan. Unlike prospectively rated policies where the premium is fixed at the beginning of the policy period, a retrospectively rated plan adjusts the final premium based on the actual losses incurred by the insured during the policy period. This particular endorsement applies the retrospective rating over a three-year term and can encompass multiple lines of insurance (e.g., General Liability, Workers Compensation, Commercial Auto). The calculation involves several components detailed in the endorsement, such as a basic premium, a loss conversion factor, and tax multipliers, and is subject to a minimum and maximum premium also agreed upon in advance.
Classes of business it applies to
This endorsement is typically used for larger insureds that have a significant premium volume and a credible loss history. The three-year term helps to smooth out the impact of large or unusual losses that might occur in a single year. It is suitable for businesses that are committed to risk management and loss control, as their efforts can directly impact their final insurance costs. Examples of businesses that might use this form include:
- Large manufacturing companies
- Construction firms with substantial ongoing projects
- Transportation and logistics companies with large fleets
- Businesses with a significant number of employees where Workers' Compensation is a major cost driver
Essentially, any large commercial entity with multiple lines of coverage and a desire to have its premium more closely reflect its own loss experience over a longer timeframe could be a candidate.
Special considerations
Implementing a retrospective rating plan, especially a three-year plan, requires careful consideration and understanding by all parties:
- Complexity: Retrospective rating formulas can be complex. The insured must fully understand how their losses will impact their premium calculations, including the timing of adjustments.
- Cash Flow Impact: Premium adjustments can occur throughout the three-year period and after its conclusion, leading to either additional payments or refunds. This can impact the insured's cash flow.
- Loss Development: Losses, particularly for liability claims, can take time to fully develop and be reported. The three-year plan allows for a longer view of this development.
- Commitment: A three-year plan implies a longer-term relationship and commitment between the insurer and the insured.
- State Regulations: While this is a multi-state form, specific state regulations regarding retrospective rating plans must still be adhered to.
For example, a large construction company might opt for a three-year retrospective plan to cover its general liability and workers' compensation exposures across multiple projects. If they have a strong safety program and experience fewer losses than initially projected over the three years, they could receive a significant premium refund. Conversely, if unexpected severe losses occur, their premium could increase up to the agreed-upon maximum.
Key information for agents and underwriters
For Agents:
- Ensure the client has a sophisticated understanding of insurance and risk financing.
- Clearly explain the mechanics of the retrospective premium calculation, including all factors like the basic premium, loss conversion factor, tax multiplier, minimum and maximum premium, and loss limitations.
- Discuss the potential for premium volatility and the impact on the client's budget and cash flow.
- Emphasize the importance of the client's loss control and risk management efforts.
For Underwriters:
- Thoroughly analyze the insured's loss history over an extended period (more than just the prior three years if possible) to assess stability and predictability.
- Evaluate the effectiveness of the insured’s safety and loss control programs.
- Assess the financial stability of the insured to ensure they can handle potential additional premium obligations.
- Carefully select the appropriate rating elements (minimum and maximum factors, loss conversion factor) to create a plan that is both attractive to the insured and adequately protects the insurer.
- Consider the types of exposures across the multiple lines being included and any potential correlations in loss experience.
- Ensure all necessary data for premium calculation will be available and accurately tracked over the three-year period and beyond for loss development.