With retrospective rating plans (retros), the final workers’ comp premium paid for the policy year is calculated retroactively, based on the actual losses incurred during the year.
The retro is actually an endorsement to a basic workers’ comp plan that has been rated using a standard cost formula. The plan usually designates a maximum and minimum premium, and buyers may choose to buy a per-claim stop-loss limit that caps the claims payments’ impact on the premium calculation.
When a Retro Makes Sense
Take, for instance, a software design firm that has 60 employees. The owners are committed to maintaining a safe, productive work environment, but two employees were injured in an auto accident while on company business. That one-time event has hurt the employer’s experience modification factor. The company is financially sound, and the owners are willing to take some risk to lower their premium. The company is a prime candidate for a retrospective rating plan.
Retro plans make sense for companies that:
- are willing to take risk.
- are financially sound.
- have strong safety and return-to-work programs.
- have management that is committed to safety.
- have claims that tend to be frequent, rather than severe.
When a company with a high experience mod takes action to reduce injuries and get workers back to work, it is appropriate to consider a retro plan. Switching to a retro allows a company to almost immediately reap the rewards of reduced comp claims.
In addition to saving premium dollars, based on a good claims experience, retros:
- can be designed to fit a company’s specific needs.
- are fairly priced so premiums truly reflect claims costs.
- encourage continual vigilance on loss control and early return-to-work.
With a retro, there are no surprising, hidden costs.
What Is the Risk?
Retros are a win-lose proposition. If you successfully reduce claims, you reap the rewards the following year. But if you have a significant workers’ comp loss, you will make additional premium payments after the end of the policy year — potentially for several years.
In comparison, a guaranteed cost plan locks in the yearly workers’ comp premium, based on your current experience mod. A bad claims’ year does not impact your current premium, but will affect the next year’s experience mod and premium.
Retro plans involve more paperwork for employers. As long as there are open claims, the insurance company will issue premium credits or debits, which adds uncertainty to budget planning. Even if you switch carriers, you may be reminded annually of your past claims’ experience — when the previous carrier sends a bill for additional premium.
Variations on Retros
Variations on retros, available in some states, provide potential premium savings while limiting the risk of paying additional premium for the policy year.
- Sliding scale dividend plan: returns a dividend to the customer after the policy period, if losses are low and if the insurance company makes an overall underwriting profit. There is no penalty for excessive losses and no guarantee of dividend payment.
- Retention plan: returns a dividend to the customer if the incurred losses and the insurance company’s expenses (the retention) are low.
There are many ways to structure a workers’ comp program. Each variation has advantages and disadvantages. Whether your company has a guaranteed price plan, a retro or a variation on a dividend or retention plan, sooner or later you will pay for your workers’ comp losses.
As always, the best way to control comp costs is to prevent injuries and get injured employees back to work.
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