Does ANYONE "get" Retrospective Rating?

[chicken_po_boy]

I have reviewed the W&M Worker's Comp Retrospective Rating example several times (Ch. 15), and I still don't 'get it'. I wrote down the formulas (which I do not understand, but I think I need to memorize):


Retro Premium = [Basic Premium + Converted Losses] * Tax multiplier
(where Retro Premium is subject to Max and Min limits)

Basic Premium = [Expense Allowance - Expense Provided through LCF + Net Insurance Charge] * Standard Premium

Expense Provided through LCF = ELR * (LCF - 1.0)

Net Insurance Charge = [Insurance Charge - Insurance Savings] * ELR * LCF

Converted Losses = Reported Losses * LCF


This seems like a lot to memorize when you do not understand one bit of it. Can anyone provide an explanation of what all this means? Do you think it's testable?

[gaddy]

I like to refer to the multiple choice questions from prior exams as indicators of what the exam committee believes is too detailed to memorize/regurgitate on an exam. There is a problem asking something like "which of the following elements is NOT included in retrospective rating?" To me, that tells a lot. They thought it was hard enough to recall the equation and pick from a list of 5 things which was NOT in the equation. I got it wrong! I spout my opinion probably too much on here, but since that exam I have not touched this equation.

[rj_rattigan]

I have reviewed the W&M Worker's Comp Retrospective Rating example several times (Ch. 15), and I still don't 'get it'. I wrote down the formulas (which I do not understand, but I think I need to memorize):


Retro Premium = [Basic Premium + Converted Losses] * Tax multiplier
(where Retro Premium is subject to Max and Min limits)

Basic Premium = [Expense Allowance - Expense Provided through LCF + Net Insurance Charge] * Standard Premium

Expense Provided through LCF = ELR * (LCF - 1.0)

Net Insurance Charge = [Insurance Charge - Insurance Savings] * ELR * LCF

Converted Losses = Reported Losses * LCF


This seems like a lot to memorize when you do not understand one bit of it. Can anyone provide an explanation of what all this means? Do you think it's testable?

I don't know if this helps, but here goes:

1. In general, retro prem will vary based on actual losses (duh), but subject to limitations.

2. BP is kind of like the expected value of all the stuff that's not allowed to vary based on the loss - u/w expenses excl prem tax, expected prem above max/below min (net insurance charge), etc.

3. The converted losses are actual losses, capped @ per occ and loaded for LAE.

[X Double Prime]

Is the LCF factor a combination of a capping factor (should I say LER?)and an ALAE load?
Is it generally greater than 1?
Does this imply the ALAE outweighs the savings from capping?

[X Double Prime]

Wait... reported losses according to WM are already capped.
Then LCF is basically a Loss Adjustment Expense Load. (ULAE+ALAE load). Why don't they just say that?

The LCF generally represents the portion of the expense allowance that varies with losses, such as ALAE...

Basic Premium seems to be loading up the Standard Premium for expenses. You would think that any starting point premium would be loaded for expenses. Any "unloaded" premium should be called the expected loss cost.

But retro-rated starting point premiums do not provide for an expected loss cost. The actual losses are paid back to the insurer by the retro adjustment. So "standard premium" makes a good marker. Basic premium adjusts it for expected expenses which presumably could vary by risk, since otherwise it would be included in the SP.

And another thing...why the ELR? What premium is the basis for this ELR? The final audited premium? The basic premium?

Sorry all, its late im just thinking out loud.

[MightySchoop]

And another thing...why the ELR? What premium is the basis for this ELR? The final audited premium? The basic premium?



Manual premium.

[rj_rattigan]

Manual premium.

Standard Prem = "Net" premium minus exp const plus prem discount. This is subject to exp const and schedule mod, so not equal to manual prem.

[MightySchoop]

My mistake. I apologize. For the record, I think that it's stupid that retro rating is covered on this exam, especially in as sparse detail as it is. I remember taking this thing and thinking exactly like c p b above -- an awful lot to memorize if you don't understand it. Doubly so if you know that it's covered in detail on exam 9.

[rj_rattigan]

My mistake. I apologize. For the record, I think that it's stupid that retro rating is covered on this exam, especially in as sparse detail as it is. I remember taking this thing and thinking exactly like c p b above -- an awful lot to memorize if you don't understand it. Doubly so if you know that it's covered in detail on exam 9.

Agreed. Though "double jeopardy" doesn't seem to trouble the CAS too much. If you haven't looked at the module 6 draft syllabus, don't look now unless you really enjoyed memorizing the details of ISO forms for coml and personal insurance covgs.

[chicken_po_boy]

I don't know if this helps, but here goes:

1. In general, retro prem will vary based on actual losses (duh), but subject to limitations.

2. BP is kind of like the expected value of all the stuff that's not allowed to vary based on the loss - u/w expenses excl prem tax, expected prem above max/below min (net insurance charge), etc.

3. The converted losses are actual losses, capped @ per occ and loaded for LAE.

Thanks. I have decided to memorize these equations, even though I still have a rather poor understanding of it all.

wrt to the converted losses... you mentioned they are capped @ per occ and "loaded for LAE". Does that mean all the LAE is included? In other words, do we cap just the losses at the per occ limit, then add in ALL the LAE (even if it exceeds the per occ limit)? Or... do we cap "losses + LAE" at the per occ limit?

[gaddy]

Over-achiever!

[MightySchoop]

Wait... reported losses according to WM are already capped.
Then LCF is basically a Loss Adjustment Expense Load. (ULAE+ALAE load). Why don't they just say that?

Because it's not the only thing in the LCF. There are other loss-related expenses that are technically "taxes," in particular "second injury fund" assessments. These are included in the LCF. But in terms of CAS 5, thinking of it as a LAE loading is probably sufficient.


Basic Premium seems to be loading up the Standard Premium for expenses. You would think that any starting point premium would be loaded for expenses. Any "unloaded" premium should be called the expected loss cost.


nope - that multiplier that you apply to standard premium to get to basic premium is less than 1. You are actually unloading a portion of the loss cost and the loss-related expenses from the standard premium.