An insurance policy in which the final premium is based on the insured’s actual loss experience during the policy term. It is subject to a minimum and maximum premium and the final premium is determined by a formula which is outlined in the insurance contract.
The insured typically pays installments, just as they would on a guaranteed cost insurance program. In 18 months from the inception of the policy, the insurance company does the first valuation of the losses and plugs them into the Retro Premium formula.
If the losses are favorable, then the insured could get a return premium, based on the stated minimum premium and the various factors involved.
If the losses are unfavorable, then the insured could end up paying a higher premium than they would under a guaranteed cost insurance program. All retro plans have a maximum premium, which will cap the amount of premium the insured must pay.
After the first calculation at 18 months, there will be subsequent calculations every 12 months until all losses are closed out.
Retrospective Rating plans are contracts with the insurance company and are not subject to the carriers losses or other insureds losses.