Which statement best describes the difference between retrospective rating and guaranteed cost?

Which statement best describes the difference between retrospective rating and guaranteed cost?

• A. The retrospective rating plan uses a fixed premium, while guaranteed cost adjusts after the policy period based on losses.
• B. The retrospective rating plan adjusts premium after policy period based on actual losses, while guaranteed cost uses a fixed premium for the policy period.
• C. Both plans adjust premiums after the policy period based on actual losses.
• D. Neither plan considers losses in setting premium.

Answer: (B)

Retrospective rating ties the final premium to the losses actually incurred during the policy term. You pay an estimated premium upfront, then after the period ends the insurer adjusts the premium based on the actual losses, which can result in a refund or an additional charge. Guaranteed cost, on the other hand, fixes the premium for the entire policy period and does not change based on losses. So the statement that best describes the difference is that retrospective rating adjusts after the policy period based on actual losses, while guaranteed cost uses a fixed premium. If losses are low, retrospective rating can end up cheaper; if losses are high, the final premium rises. The guaranteed-cost approach remains constant regardless of losses.

Retrospective rating ties the final premium to the losses actually incurred during the policy term. You pay an estimated premium upfront, then after the period ends the insurer adjusts the premium based on the actual losses, which can result in a refund or an additional charge. Guaranteed cost, on the other hand, fixes the premium for the entire policy period and does not change based on losses. So the statement that best describes the difference is that retrospective rating adjusts after the policy period based on actual losses, while guaranteed cost uses a fixed premium. If losses are low, retrospective rating can end up cheaper; if losses are high, the final premium rises. The guaranteed-cost approach remains constant regardless of losses.