A retro workers’ compensation policy, also known as a retrospective rating plan, is a complicated program based on actual losses and a rating method. Calculating a retro plan premium can be difficult, and the process is a different alternative to regular workers’ compensation. The employer offering this type of policy may be able to reduce costs by using it, but there are pros and cons for both employers and employees.
How a Retro Workers’ Compensation Policy Works
A retrospective insurance policy depends on losses that the insured experiences during their policy period:
- The insured person initially pays a premium based on what their losses are expected to be.
- Then, once the policy period is over, the premium is adjusted (increased or decreased) to match the insured individual’s actual losses.
- A certain mathematical formula is used to calculate a minimum and maximum premium, which determines the least and most an employer will pay on a policy.
Retrospective rating in workers’ compensation is an alternative to guaranteed cost. When insurance is based on guaranteed cost, the premium is not affected by the number of claims a worker makes (or how large their claims are) during their policy period.
A guaranteed cost policy may undergo an experience rating, which makes adjustments to the insured’s future premiums based on previous policy periods. In contrast, retro ratings make adjustments based on the current policy period. Retro ratings may also take into account past losses, but the current ones are most relevant to any premium changes.
Calculating the Retro Premium
To calculate the premium on a retrospective workers’ comp policy, the insurance carrier will combine the basic premium (which covers the insurer’s costs to issue and maintain the policy) with the converted losses (which include expenses of claim adjustments and claim payments made by the insurer). That number is then multiplied by a “tax multiplier.” This might produce the official retro premium, or there might be additional factors added to the total if the plan includes loss limits.
The retro premium will also depend on the company’s minimum and maximum premiums. These will be determined by multiplying a minimum premium factor and a maximum premium factor each by the standard premium.
If the retro premium is calculated and ends up being less than the minimum premium, then the retro premium would become the minimum since it cannot be lower. The same goes for a calculation that is more than the maximum premium. The retro premium amount must follow within the minimum and maximum parameters.
When Retro Workers’ Comp Plans Are Adjusted
Retro workers’ compensation policies are periodically adjusted. Typically, the first adjustment is required six months after the expiration of the policy, then another 12 months later and another 12 months after that. This allows the insurer to re-evaluate losses and recalculate the premium.
Types of Retro Workers’ Compensation Plans
There are many different types of retrospective rating plans, including:
- Incurred Loss
- Paid Loss
- Depressed Payroll
The two most common are Paid Loss and Incurred Loss retro plans.
Paid Loss plans are pricey and typically only used for large clients who can pay premiums above $1,000,000. Incurred Loss plans, on the other hand, are much more affordable to set up and the most popular.
Pros and Cons of Retrospective Ratings in Workers’ Compensation
There are certainly potential advantages to a retro workers’ compensation policy, although the pros are mostly focused on the businesses that purchase the policy:
- If a business has a low level of losses, they may end up paying a lot less for their workers’ compensation insurance versus the guaranteed cost policy model.
- Through a retro plan that is adjusted so often, policyholders have a higher incentive to control their losses and help get injured workers back to work.
- The business can also expect to pay a premium more closely correlated with their actual losses for the current policy period.
The main con of a retro workers’ compensation policy is the risk of losing money. If the business’s losses are much higher than they expected, they will face a larger additional premium. There is a risk of higher fluctuations compared to guaranteed cost workers’ comp.
The employer can also run into issues if their accounting team does not understand retro plans well. Poorly-run claims can lead to higher costs.
Requirements for Retro Workers’ Compensation
The exact qualifications for retro workers’ comp plans can vary per state. In Georgia, retrospective rating plans are available for employers with an assigned risk workers’ comp insurance premium of at least $250,000, according to the National Council on Compensation Insurance (NCCI). This plan through the NCCI is called a Loss Sensitive Rating Plan (LSRP).
The LSRP plan is meant to act as a “last resort” for employers who must obtain workers’ compensation insurance but are unable to provide it through other outlets. The retro plan must be compared with other alternatives after a thorough consideration of claims experience, loss data, and projections as well as other details.
Talk to a Georgia Workers’ Compensation Lawyer for Free Today
Retro workers’ compensation policies can be complicated and difficult to understand. While they can have advantages for employers looking for a workers’ comp policy, we are focused on how each policy affects injured workers and their workers’ comp claims. If you have questions about your employer’s workers’ comp policy and how it relates to a work accident, John Foy & Associates can help.
Our Georgia workers’ compensation lawyers have been helping injured workers get the benefits they need for over 20 years. We know that insurance companies (and employers) often look for ways to reduce what they pay out on workers’ comp claims. We also know that it is your legal right to be provided with medical compensation, lost wage benefits, and more after a work injury.
Contact us today and we’ll give you a FREE consultation to discuss your situation and your best options. Plus, working with us is risk-free: we don’t take a single fee from you unless we win you money. So, give us a call today at (404) 400-4000 or contact us online to get started with your FREE consultation.