1. Forms
2. IL
3. IL-09-23

What the form is

The IL 09 23 is an ISO (Insurance Services Office) interline endorsement titled "Retrospective Premium Endorsement - Exclusion Of Retrospective Development Factors". It is designed to be used with insurance policies that are subject to a retrospective premium plan. A retrospective premium plan is a rating mechanism where the final premium paid by the insured is adjusted based on their actual loss experience during the policy period. This particular endorsement modifies the standard calculation of the retrospective premium by specifically excluding the application of retrospective development factors for losses that occur in the states designated in the endorsement's schedule. Retrospective development factors are numerical multipliers applied to incurred losses (both paid and reserved) at a certain valuation date to project what the ultimate cost of those losses will be after they are fully developed or settled over time. By excluding these factors for the scheduled states, the retrospective premium adjustment for those specific states will be determined based on the known incurred losses as of the valuation date, without any actuarial projection for future development of those claims.

Classes of business it applies to

This endorsement is not specific to a single class of business but can apply to any line of insurance (such as General Liability, Workers' Compensation, or Commercial Auto) that is written under a retrospective rating plan. Retrospective rating is typically utilized for larger insureds that have a substantial premium volume and a sophisticated approach to risk management, allowing them to directly influence their insurance costs based on their loss performance.

Real-world examples:

• A large construction company with significant operations in multiple states might request this endorsement for states where their historical loss data is very stable and predictable. In such cases, they might prefer the retro premium for those states to be based on current known losses rather than statistical projections.
• A manufacturing corporation with a strong, mature loss control program and predictable claims experience in certain states might negotiate with their insurer to use this endorsement for those states, aiming to reduce potential premium volatility driven by standard development factors.
• A business with a large commercial vehicle fleet operating across the country could seek to apply this endorsement to specific states where their historical loss development has been consistently minimal or significantly different from what standard development factors would project.

Special considerations

• Negotiated Agreement: The application of this endorsement, including the specific states listed in its schedule, is typically a result of negotiation between the insurer and the insured. It reflects a mutual agreement on how losses in those states will be treated for the purpose of the retrospective premium calculation.
• Impact on Premium Volatility: Excluding development factors can lead to greater volatility in the retrospective premium adjustments. If actual losses in the scheduled states develop more adversely than known at the valuation date, the insurer might have collected an insufficient premium. Conversely, if losses develop more favorably, the insured might have initially paid more than if development factors had been used to smooth out early reported losses.
• Significance of Valuation Dates: The timing and frequency of loss valuations become particularly critical when development factors are excluded. Premiums based on early valuations with immature loss data might not accurately reflect the ultimate cost of claims for the scheduled states.
• State-Specific Application: It is crucial to remember that the endorsement only alters the treatment of losses for the states specifically listed (scheduled) on the endorsement form. For any states not listed, the standard retrospective development factors as per the underlying retrospective rating plan will continue to apply.
• Informed Decision Required: Both the insured and the insurer must have a clear and thorough understanding of the potential financial implications of excluding these factors. This understanding should be based on a careful review of historical loss development patterns pertinent to the insured and the specific states in question.

Key information for agents and underwriters

• Pricing and Rating Impact: The exclusion of development factors directly influences the calculation of the final retrospective premium. Underwriters need to meticulously assess whether the other components of the retro plan (like the basic premium, loss limitations, and maximum/minimum premium factors) adequately account for the potential unprojected loss development in the states scheduled on the IL 09 23.
• Detailed Risk Assessment: A comprehensive analysis of the insured’s historical loss data is paramount. This includes scrutinizing loss development trends specifically for the states being considered for this endorsement. For states known for volatile or long-tail loss development, excluding development factors introduces a higher degree of uncertainty and risk for both the insurer (potential for under-collection of premium) and the insured (potential for over-collection or unexpectedly large premium adjustments).
• Underwriting Guidelines and Suitability: This endorsement is generally most suitable for sophisticated insureds who possess credible and substantial loss history, along with well-established risk management and loss control programs. Underwriters should clearly document the rationale for approving the use of this endorsement and ensure the insured fully comprehends its implications. It may be more appropriate for lines of business or specific states where loss development patterns are historically stable and predictable.
• Potential for Adverse Selection: Agents and underwriters should be mindful that insureds might request this endorsement for states where they anticipate favorable loss development that standard factors might not reflect quickly enough, or where they believe current incurred losses are temporarily overstated.
• Clear Documentation: The schedule of states for which retrospective development factors are to be excluded must be accurately and clearly documented within the endorsement itself to avoid any ambiguity.