Retrospective rating is what?

• A. Optional rating program that uses a formula for factoring loss experience into final premium
• B. Required rating method for all policies
• C. Only for large commercial policies
• D. A method that ignores loss history

Answer: (A)

Retrospective rating is an optional pricing approach where the final premium is determined after the policy period by applying a formula that uses the insured’s actual loss experience. The insured pays a base minimum premium up front, and the ultimate premium is adjusted up or down based on the losses incurred during the period, usually with a specified maximum limit. This structure makes the cost more closely reflect the insured’s actual risk, rewarding lower-than-expected losses with a lower final premium and limiting how high it can go if losses are higher. It isn’t required for all policies, and it definitely uses loss history rather than ignoring it; while it’s common for large commercial accounts, it isn’t limited to them.