Which significant expense is typically saved by using a retrospective rating plan?

Which significant expense is typically saved by using a retrospective rating plan?

• A. Auditing
• B. Claims adjustment
• C. Taxes and fees
• D. Insurer risk charges

Answer: (D)

Retrospective rating ties the final premium to actual losses incurred during the policy period. Because the insurer’s price is based on real experience rather than an estimate of expected losses, the amount built into the premium to cover the risk of loss variability—insurer risk charges—can be reduced. In other words, the plan shifts more risk onto the insured after losses are known, which lowers the insurer’s need to charge high risk-related costs up front. Auditing, claims adjustment, and taxes/fees still occur, but they aren’t typically the expenses that retrospective rating appreciably cuts.

Retrospective rating ties the final premium to actual losses incurred during the policy period. Because the insurer’s price is based on real experience rather than an estimate of expected losses, the amount built into the premium to cover the risk of loss variability—insurer risk charges—can be reduced. In other words, the plan shifts more risk onto the insured after losses are known, which lowers the insurer’s need to charge high risk-related costs up front. Auditing, claims adjustment, and taxes/fees still occur, but they aren’t typically the expenses that retrospective rating appreciably cuts.