What Is Retrospective Rating?

A Retro Plan Uses Current Loss Experience to Calculate Your Premium

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Retrospective rating is an insurance pricing method in which the premium is directly affected by losses that occur during the policy period. The insured pays a provisional premium based on projected losses. After the policy has expired the premium is adjusted up or down to reflect the insured's actual loss experience during the period of coverage.

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Retrospective rating is commonly used in workers compensation insurance. It is occasionally used in general liability, commercial auto liability, and commercial auto physical damage insurance.

Loss Sensitive Versus Guaranteed Cost

Most workers compensation insurance is written on a guaranteed cost basis. When you buy a guaranteed cost policy your premium is not affected by the number or size of claims you sustain during the term of the policy. If your policy is subject to experience rating, your cost of insurance will be impacted by losses that occurred in the past, not current losses.

Like dividend plans and workers compensation deductibles, retrospective rating (retro) plans are loss sensitive. This means that the amount you pay to insure your workers compensation risks during a particular policy period is partly determined by your loss experience during that period. If your losses are greater or less than anticipated, your cost of insurance may be higher or lower as well.

Advantages and Disadvantages

A retrospective rating (retro) plan offers some potential advantages. First, businesses that have good loss experience may pay significantly less for workers compensation insurance under a retro plan than they would under a guaranteed cost program. Secondly, a retro plan gives policyholders an incentive to implement strong loss control loss and return to work programs. Thirdly, the premium an employer pays for a policy reflects the employer's actual loss experience for the period covered by that policy. The primary disadvantage of retrospective rating is the risk of a large additional premium if an employer's actual losses are significantly greater than expected.

Eligibility Requirements

All states have established retro plan eligibility requirements. For instance, many specify a minimum premium threshold of $25,000 for a one-year plan and $75,000 for a three-year plan.

About three-quarters of the states in the U.S. (and Washington D.C.) have adopted a retro plan created by the NCCI. The remaining states utilize independent plans. Many states allow insurers to utilize their own proprietary retro plans with the approval of the state workers compensation authority.

How Retrospective Rating Works

When a policy is subject to retrospective rating, the premium is calculated using a mathematical formula containing the elements described below.

  • Standard premium. The amount the coverage would cost if it weren't retrospectively rated (i.e., if it were written on a guaranteed cost basis). It includes the experience modifier but does not include a premium discount.
  • Minimum premium. Calculated by multiplying the minimum premium factor by the standard premium. It is the least the employer will pay for the policy.
  • Maximum premium. Calculated by multiplying the maximum premium factor by the standard premium. It is the most the employer will pay for the policy.
  • Basic premium. Calculated multiplying the basic premium factor by the standard premium. The basic premium covers the expenses the insurer incurs to issue and maintain the policy.
  • Expected losses. Included in the retro formula at the policy inception date. When adjustments are made after the policy has expired, actual losses are used.
  • Loss conversion factor. Multiplied by losses to calculate converted losses. Converted losses include both claim payments and the insurer's claims adjustment expenses.
  • Tax multiplier. A factor applied to the premium as a charge for premium taxes and various assessments.

To calculate the retro premium, the insurer adds the basic premium to the converted losses. It then multiplies that sum by the tax multiplier. Some retro plans may include factors not outlined above. For instance, some include a loss limit, which caps losses that exceed a certain threshold (such as $100,000). If a plan includes a loss limit, a loss limit factor will be added to the formula.


The following example demonstrates how a retro premium is calculated. ABC Inc., a large manufacturer, has just purchased a workers compensation policy for the period January 1, 2019, through January 1, 2020. ABC's expected losses for that period are $50,000 and its projected payroll is $45 million. The rate is $1.00 and ABC's experience modifier is .90.

ABC's insurer has calculated the retro premium using the following factors:

  1. ABC's estimated standard premium: ($1.00 X $45,000,000) Ă· by 100 = $450,000 X .90 = $405,000
  2. ABC's expected losses: $50,000
  3. Minimum premium factor: 60%.
  4. Minimum premium: .60 X $405,000 = $243,000
  5. Maximum premium factor: 130%.
  6. Maximum premium: 1.30 X $405,000 = $526,500.
  7. Basic premium factor: .145
  8. ABC's basic premium: $405,000 X .145 = $58,725
  9. Loss conversion factor: 1.12
  10. ABC's converted losses: $50,000 X 1.12 = $56,000
  11. Tax multiplier: 1.07

ABC's estimated retro premium is determined by adding its basic premium ($58,725) to its converted losses ($56,000) and multiplying the sum by the tax multiplier (1.07). The result is $122,756. This number is less than the minimum premium ($243,000) so ABC's retro premium is $243,000.

Premium Adjustments

A key feature of a retro plan is periodic adjustments. Many plans require the first adjustment six months after the policy has expired. A second adjustment is made 12 months later (18 months after expiration) and a third one 12 months after that (30 months after expiration). The insurer recalculates the premium at each interval using a current assessment of losses. If the premium is less than the amount previously paid, the insurer returns the excess to the policyholder (subject to the minimum premium). If the premium is greater than the insured's initial payment, the insurer bills the insured for the amount due (subject to the maximum premium).