Retrospective Rating

What Does Retrospective Rating Mean?

Retrospective rating is the practice of adjusting an initial premium based on the actual losses incurred. The initial premium for a retrospectively rated policy is determined based on an estimate, with the understanding that it will be adjusted later according to the losses experienced during the policy period. Most business policies do not work this way, since insurers typically calculate business insurance premiums at the start of the policy and leave them fixed regardless of what claims occur.

Insuranceopedia Explains Retrospective Rating

The formulas used in retrospective rating calculations are specific to individual companies but must be filed with the State Department of Insurance.

If a company calculates premiums using an unapproved formula, the insurance provider must recalculate the premium according to the official guidelines set by the state-specific rating organization (such as the NCCI or the local State Rating Bureau). The insurer is then required to offer the correct premium based on the approved formula. Retrospective rating is most commonly applied to workers’ compensation policies for medium and large employers, because those accounts generate enough claims data for the year-end adjustment to produce a meaningful refund or additional charge.