Incurred Loss Retro Plan

Retros Give You More Control of Your Workers’ Comp Dollars

Retros Give You More Control of Your Workers’ Comp Dollars
Workers’ compensation can be a major investment for your business. That’s why Summit offers alternative-risk financing programs that give you more control over your workers’ comp dollars. These programs, called retrospective rating plans (retros), differ from conventional guaranteed cost programs by offering additional savings for businesses that place an emphasis on workplace safety.

Summit’s Incurred Loss Retro adjusts your ultimate premium on the basis of losses incurred during the policy year.* The better you manage your losses, the more money you save. And with Summit’s loss control services, aggressive claims management and Back2Work™ program here to help, a retro plan could show you substantial savings.

So, how does an Incurred Loss Retro work? Read on for the answers to some frequently asked questions about retro plans to help you understand your options.

* Losses discussed throughout this brochure include allocated loss adjustment expense.

What is an Incurred Loss Retro plan?
An Incurred Loss Retro plan is a way for medium- to large-sized companies to reduce workers’ compensation premium by assuming more of the risk. It adjusts the ultimate premium on the basis of losses incurred during the policy period. You’ll pay the same up-front as with a guaranteed cost program, but you’ll be refunded money if your loss experience is favorable. The risk, however, is having to pay additional premium if your loss experience is unfavorable.

How does an Incurred Loss Retro work?
Prior to the effective date of coverage, we’ll have a conversation with you and your agent to determine the amount of risk you are willing to assume. That risk tolerance, in addition to our underwriting guidelines, will determine your maximum premium factor. This factor will be used to calculate the retro premium and also to establish the maximum amount of premium that you may be responsible for during a contract period.

Next, you will be presented a written agreement which defines the terms of your contract. It will show the maximum and minimum premium, how the premium will be paid during the policy year, how the retrospective premium will be calculated and, most importantly, when you will be eligible for a premium refund. The agreement also defines any penalties associated with a midterm cancellation of the contract.

What is the maximum premium?
Maximum premium is the most you will have to pay under a retro plan. It helps protect you by placing a limit on the impact of any substantial losses you could have. It can range from 100 percent up to 150 percent of audited standard premium. For example, if the audited standard premium was $100,000 and you selected a 125 percent max, the most you could pay for the total of all retro charges under the specific contract period is $125,000.

What is retrospective premium?
Retro premium is the ultimate amount of money you will owe for the contract period. It consists of basic premium and converted losses, both of which get adjusted by the tax multiplier (see below). If it is more than the discounted premium that you have paid in, you’ll owe the balance. But if it is lower, you’ll be refunded the difference as a return of premium.

What is the basic premium?
Basic premium is Summit’s cost of doing business. It provides for expenses for acquiring and servicing your account, our loss control services, premium audit and other contingencies. It also includes a charge for the risk that we’ve assumed since your cost is limited by the maximum premium. It does not account for claims, claim adjustments and taxes.

Basic premium is determined by multiplying the standard premium by a percentage called the basic premium factor. This factor varies based on your actual premium size and the amount of risk you are assuming. In general, if you take on more risk for your claims, the amount you will pay for the basic premium decreases.

What are converted losses?
Converted losses are the total claims, also called incurred losses, adjusted by the tax multiplier (see below), and multiplied by the loss conversion factor (LCF) which is negotiated with you prior to the inception of the coverage. As the loss conversion factor increases, you assume more risk, so the basic premium decreases.

What is a tax multiplier?
This is a factor that is applied to the basic premium and converted losses to cover state taxes and assessments that must be paid by Summit.

Does participating in an Incurred Loss Retro plan change the coverage or benefits my business and employees receive?
No. You receive the same coverage and benefits when participating in an Incurred Loss Retro plan as you do in a guaranteed cost program.

Who can be on an Incurred Loss Retro plan?
Businesses with the following standard premiums* qualify for an Incurred Loss Retro:

• Bridgefield Casualty Insurance Company—$75,000+
• Bridgefield Employers Insurance Company—$75,000+
• BusinessFirst Insurance Company™—$25,000+
• Florida Retail Federation Self Insurers Fund—$25,000+
• Louisiana Retailers Mutual Insurance Company—$50,000+

* Standard premium is calculated using the various premium credits and experience mod, but it does not include the premium discount percentage.

How do I pay for this policy?
During the 12 months of the policy period, you pay the full amount of the discounted premium in installments according to your selected payment plan.

When will my money be returned if losses are good?
After completing the full contract period, the first adjustment for a possible refund will be calculated 6 months after the policy expiration date. The premium will be adjusted according to the retro formula, using the basic premium, converted incurred losses and taxes. If losses are good, you will get 50 percent of the total estimated refund. Another adjustment will be made in 12 months with 25 percent of the total estimated refund, and the final adjustment 12 months after that with the final 25 percent. These last two adjustments may differ than described if the losses change from the amount used at the initial adjustment.

What if the incurred losses are bad?
If the retro premium, based on incurred losses, is greater than the total premium that you have paid in, you are responsible for any shortfall up to the maximum premium amount.

What if I have no claims?
If you have no claims, you would only pay the basic premium and taxes. Without any incurred losses, you’ll be refunded the difference between the normal premium you have paid in, and the final calculation of the retro premium (per the schedule).

What if I want to cancel the retro contract during the year?
If your business closes, the premium is generally calculated on the audited standard premium for the period of coverage. You will not face any penalties for this type of cancellation. However, there are provisions in the retro contract that address future adjustments for current losses. It adjusts the maximum premium as if you were in the plan for the full year.

Advantages

• Allows business to determine the degree of risk they will assume.
• Offers the possibility of a contractual return of premium.
• Is specific to individual loss experience, not on a sliding scale.
• Rewards companies that have a strong commitment to workplace safety by possibly reducing the final premium due.

Disadvantages

• Final premium obligation is not known until after policy expires.
• Risk of having to pay the maximum premium.
• Penalties for early termination.

Want to see the math?
Here are the formulas we use to calculate our retros.

Retro Formulas

Maximum Premium = Standard Premium x Maximum Premium
Factor Basic Premium = Standard Premium x Basic Premium Factor
Minimum Premium = Basic Premium x Tax Multiplier
Converted Losses = Incurred Losses x Loss Conversion Factor (LCF)
Retrospective Premium = (Basic Premium + Converted Losses) x Tax Multiplier
Plan Premium = (Normal Premium x Loss Ratio x Loss Conversion Factor x Tax Multiplier) + Minimum Premium
% of Losses to reach Maximum Premium = (Maximum Premium – Minimum Premium) ÷ Tax Multiplier ÷ Loss Conversion Factor ÷ Normal Premium

* This example illustrates basic premium factors based on the Florida Retail Federation Self Insurers Fund schedule of factors filed with the state of Florida effective 7/1/06.