Retrospective Premium

What Does Retrospective Premium Mean?

A retrospective premium is a payment made by a policyholder to an insurance company that is not based on a fixed amount but rather on the claims incurred during a policy period. However, the policyholder is still required to make an initial payment to the insurance company before the retrospective premium is determined.

Insuranceopedia Explains Retrospective Premium

Big, stable companies that can predict losses during a fiscal year are typically the clients who use this type of premium program. A retrospective plan often covers multiple risks. For example, a company may obtain a retrospective policy that includes coverage for workers’ compensation, property damage, and liability. The liability portion is usually general liability insurance, which covers third-party bodily injury and property damage claims arising from the company’s operations. While the losses may be predictable, they should not be severe enough to threaten the stability of the policyholder’s business.

Under a retrospective premium plan, the policyholder makes an initial payment to the insurance company. During the policy period, the policyholder files claims for covered losses. These claims are subject to a maximum and minimum amount. The amount tied to workers’ compensation coverage tends to be one of the bigger swing factors in these calculations, since workplace injury costs can vary widely between fiscal years. At the end of the policy period, the insurance company will determine the final premium based on the claims made during the period and whether those claims fall within the established minimum and maximum thresholds. Most business policies work the opposite way, where premiums are calculated upfront based on underwriting factors and held steady regardless of how the year’s claims actually unfold.