Retrospective Premium Evaluation Process

Marsh USA

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Published: 22-Aug- 2011 | Product Category: Risk Consulting | Comments: 0

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Many historic insurance programs include policies subject to retrospective (retro) premiums—where the amount of premium ultimately paid for a given policy is dependent on actual losses and/or reserves under that policy. Often the existence of these retro premiums remains unknown to a company’s current risk management or legal staff until an insurer issues a retro premium “adjustment” (i.e., an invoice) many years after the effective period of the policy.

Even companies that possess a detailed understanding of their historic insurance programs typically have little knowledge of the retro premium components. As a result, when retro premium adjustments are issued, policyholders routinely pay them with little to no understanding of whether the insurer has calculated the adjustment correctly or if it is in line with the terms of the original program agreements.

Understanding the retro premium components of a company’s historic insurance program is critical to evaluating its overall insurance asset. The benefits of having this knowledge go beyond being reactive to adjustments as they are issued. It allows a policyholder to be proactive in preparing for the associated financial impact.

In the context of legacy liabilities, a retro premium program can have a significant bearing on the total costs an insured will incur in connection with the defense and settlement of claims. A complete understanding of this impact provides the opportunity to design and implement an insurance recovery strategy that minimizes the negative financial implications where possible. Additionally, understanding the retro programs will allow a policyholder to forecast the potential future retro premium costs and establish the proper reserves.

The Marsh Risk Consulting Solution

The Mass Tort and Complex Liability Practice of Marsh Risk Consulting (MRC) has the expertise necessary to evaluate these legacy retros. Our consultants have extensive experience in evaluating how retros apply to legacy claims and have repeatedly helped clients understand and prepare for retros.

Our consultants conduct a comprehensive review of the terms of the retro program to assess the manner in which the retro premium was intended to be calculated as well as the pertinent factors included in these calculations. Our consultants can then assist by:

verifying the maximum premiums (and the distance to program caps);
validating retro adjustments;
developing protocols and tools to help clients independently validate future adjustments;
assisting clients in allocating losses to develop reserves for future adjustments; and
negotiating collateral reductions

Our consultants’ efforts have saved our clients millions of dollars through the identification of inaccurately calculated retro premium and the negotiation of collateral reductions.

By working with our consultants, policyholders can remove the unknown from their insurance programs and be assured that any retro premium adjustment they receive is valid and accurate based upon the available claims data. Moreover, financially, they can be better prepared to absorb the costs associated with retro adjustments as they arise.