About Retro

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What is retrospective rating?

Retrospective Rating (Retro) is an optional financial incentive program offered by L&I to help qualifying employers reduce their industrial insurance costs.

Employers can enroll on their own or in group plans sponsored by trade associations and/or professional organizations (individual vs. group participation). Employers may receive premium refunds or they may be assessed additional premium based on their performance.

Select a topic for more information:

• Individual vs. Group participation.
• Understanding "Developed Losses".
• Glossary of Terms.

Enrolling in Retro doesn't change at all the industrial insurance rates assigned to an employer, or the premiums which are paid on a quarterly basis. There is no special "up-front discount" just for enrolling in retrospective rating. An employer's rates and experience factor are re-calculated for each calendar year, just as they otherwise would be.

A Retro coverage period lasts 12 months, beginning any calendar quarter. About 10 months after the end of a given Retro coverage period, L&I looks back and calculates the retrospective premium. This is also known as a "Retro adjustment" (the first of three). If claim costs for the coverage period are lower than anticipated, a portion of the premiums paid are refunded. If, however, claim costs are above a certain point (depending on the plan and level of risk chosen when the employer enrolled), an assessment for additional premium would be made. There is a pre-selected limit to this additional assessment, but it is critical that this risk is recognized and understood. It is a very real contingent liability.

One of the key features about Retro is that when calculating retrospective premium, only claims with a date of injury within the Retro coverage period are considered. No other claims — even if they are still open with benefits being paid — are considered. Because you start each coverage period with a "blank slate," sometimes the best time to participate in Retro is when your regular rates are relatively high because of previous unfavorable claims experience.

A second Retro adjustment, which may result in additional refunds or assessments, is performed about 12 months after the first adjustment (about 22 months after the Retro year ended). The time period between the end of a coverage year and when adjustments are done allows employers time to get their claims closed and more time for the Retro claims to "mature" (so L&I will have a better estimate of their eventual final costs). A third and final adjustment is done 12 months after the second adjustment, with the same rules applying.

Retro employers enjoy the following benefits:

• Potential for premium refunds.
• Claim management assistance not otherwise available.
• Automatic monthly & quarterly reports that track their claims.
• Support/liaison assistance from their financial incentive coordinator.
• Direct access (external access) to L&I information via the Internet.

...but at the risk of being assessed additional premium.

Individual vs. Group Participation

If eligible, an employer can enroll in Retrospective Rating on its own, or in an association-sponsored group plan. There are some potential advantages, particularly for smaller employers, to participating via a Retro group. L&I has no preference whether an individual enrolls on their own or with a group. We don't endorse any particular group. We do encourage, however, that all options are explored prior to making a decision on which enrollment method is used.

A Retro financial incentive coordinator can provide a list of all the associations which currently sponsor Retro groups. Individuals interested in enrolling should contact any association which interests them to find out more about them. Here are some common questions a potential enrollee might ask:

• How much is the group risking? (A maximum premium ratio (MPR) of 1.15 means they are risking an additional 15% – see Retro tables).
• How well has their group done in Retro in the past?
• How are refunds/assessments distributed? Are they done on a straight "pro-rated" basis?
• Do they use a "merit-rated" distribution plan?
• Do they use a combination pro-rated/merit plan?
• When are refunds or assessments made?
• What services do they provide to group members to promote accident prevention and claim management?
• What, if any, are their administrative fees?
• Will assigned risk classifications qualify the interested party for enrollment in the group?
• Can they supply names of group members to use as references?
• What is the deadline for enrolling with the group?

Enrolling in Retro doesn't change the way a company's experience factor and rates are set, or how they pay premiums to L&I.

Retro can be described as being "premium sensitive." This means that the larger the standard premium paid in, the larger the potential percentage refund. For instance, a firm risking 10% individually might do well to get a 5‑10% refund. A large group risking the same 10% and performing well might realize returns of 5‑30%, or even higher. So, refunds possible for employers in group plans may be much higher than what they could achieve on their own, given the same level of risk.

There is also a minimum level of Retro year standard premium (around $4,800) to qualify for a Retro premium adjustment. So group Retro is often the only option for smaller premium payers seeking refunds. L&I has no minimum for group members.

Another potential advantage of group Retro is the spreading of risk within the group. If a group member has a bad claim year, they may still get a refund if the group as a whole has done well. An employer having a good claim year, though, may end up with an assessment if their group didn't do well.

Many groups are very active in promoting accident prevention and claim management by group members. Some provide direct claim management help. Some even contract with a third party administrator to manage their group's claims. This can enhance their Retro performance, and may result in members seeing their own experience factor and industrial insurance rates improve over time.

To be a in a group plan, an individual must belong to the sponsoring association, and often pay an administrative fee to the group on top of association dues. Plan/MPR choices for the Retro group are made by the association. Groups might not distribute earned refunds until a given Retro year has had its last "adjustment". The association may deny enrollment to a firm which it feels isn't a good risk.

Historically, employers in group Retro (on the whole) have out-performed those enrolled on their own. By a wide margin, each situation is different, though. Some groups have achieved poor results, and many employers enrolled individually have done very well. We encourage interested parties to do their homework and explore all options. They should weigh the "pros and cons" and make the choice that is best for them.

See also: Retro Program Rules and Retro Associations

Understanding "Developed Losses"

See also: Glossary of Terms.

Retro participants are often understandably mystified by L&I's use of a claim valuation called "total incurred losses (developed)," aka developed losses, for Retro reports and calculations. It isn't uncommon for developed losses to be many times higher than actual claim costs at certain times, even when the claim is already closed. Knowing what developed losses are and how they can change dramatically over time, will minimize confusion and help you gauge how you are doing overall.

The actuarial rationale behind the use of developed losses is complex, but here is a "baker's dozen" of things participants should understand:

1. Retro is still an insurance program, and provides for some pooling of risk among all the enrollees in a coverage year. Retrospective premium isn't simply the cost of a participant's claims. A Retro employer or group with high claim costs enjoys limits on claim valuations, the number of premium adjustments, and how much extra premium can be assessed. Liabilities affected by these limits have to be shared among all the other Retro participants. This pooling of risk is one of the most fundamental principles of insurance.
2. Considering all the claims of all the employers enrolled in a given coverage period, some of them will eventually have costs dramatically higher than originally expected. This occurs when claims re-open, evolve into pension claims, or when the claimant just doesn't recover as soon as their doctor anticipated. Actuaries can project how much these long-term extra costs will be, but they can not know in advance which claims will have them.
3. Non-pension Retro claims (claims that are not fatalities or result in total permanent disability) are adjusted higher (developed) to account for the extra costs that they or other Retro claims will have over time. Pension claims, by their very nature, tend not to re-open, and don't have to have their values increased in the development process.
4. When "adjustments" (Retro refunds or assessments) are calculated about 10 months after the end of the coverage period, the developed losses for non-pension claims are usually about twice as much as their paid costs or reserves. So a routine $100 closed claim might have developed losses of around $200, and an open claim with a $50,000 case reserve might have developed losses of around $100,000. In both cases, the development occurs to account for the future extra costs of all Retro claims, and doesn't mean additional costs are expected on these particular claims. All the enrollees in a given coverage period share the same "loss development factors."
5. As time goes by, not as much development is typically needed, because aggregate incurred losses for any huge group of claims grow with the passage of time. Over time, as certain claims do re-open or realize other kinds of extra costs, the other Retro claims don't need to be developed as much. For example, the indemnity loss development factor in the first adjustment of the 7/92 coverage period was 2.1697. It dropped to 1.9083 for the 2nd adjustment, and was down to 1.6395 for the 4th adjustment. A claim which is already closed at the first adjustment and has no further costs will typically have lower developed losses in subsequent adjustments. Loss development factors certainly tend to drop over time, although they sometimes can move upward instead.
6. Early on, development of losses might be much more than a "doubling." Until a claim is about 8 months old, no multipliers (loss development factors) are used. Instead, averages are displayed that may have little to do with that particular claim. The averages themselves can be skewed "high" by a few expensive claims, so a majority of claims end up with developed losses lower than what was indicated early on, and some claims will end up with much higher developed losses than the early averages. These averages will be displayed even if a claim is closed. Once a claim is about 8 months old from its date-of-injury, no average will be used; so no average developed loss value will ever be used for adjustment purposes. (Remember that the first adjustment doesn't take place until about 10 months after the end of the coverage period. Subsequent adjustments occur in 12 month intervals.)
   
   When a claim is 8 months old and averages are no longer use, the initial loss development factors might be much more than a doubling. The factors will tend to fall over time though, and are usually close to a doubling at the time of first adjustment.
7. Regardless of what developed loss figure is show early on, you can anticipate that developed losses at the time of the first adjustment will be around twice as much as its costs or reserves. Don't be alarmed, then, if you see a Retro report with a closed time-loss claim that has only $300 in total costs, but is showing over $30,000 in developed losses. It is just those averages at work. If the claim costs are unchanged, it will have developed losses of around $600 at the time of first adjustment.
8. Developed Losses for every Retro claim are influenced by a "performance adjustment factor" (PAF) which L&I calculates for each coverage period. The PAF is another multiplier which adjusts the developed losses for both pension and non-pension Retro claims, so that the aggregate refund (net of total refunds and assessments) is proportional to how well all the Retro employers out-performed all the non-retro employers. If the Retro participants on the whole out-performed everyone else by $50 million, the PAF (and, therefore, developed losses) are set at the exact level they need to be so that L&I makes a $50 million net refund to the Retro employers. This means that overall Retro refunds have not been an arbitrary amount that L&I feels it can "afford" to pay. Aggregate refunds have been determined solely by retro vs. non-retro performance. (For coverage periods beginning after 4/10/95, PAFs are lowered somewhat to reflect an investment return on aggregate standard premium.)
   
   PAF's are used by themselves as multipliers to determine developed losses for pension claims. If the PAF is .9, then the developed losses for a $400,000 total permanent disability claim would be only $360,000.
   
   PAF's are already built in to the loss development factors used for non-pension claims.
9. Performance adjustment factors insulate Retro from the impact of overall rate changes. No matter how much "base rates" change over time, PAF's will be set at whatever level they need to be so that aggregate percentage refunds will be the same as if there were no change in the base rates, and still driven by retro vs. non-retro performance. The temporary 27% rate decrease for the last 3 quarters of 1996 is a classic example. There were concerns that lower premium levels would result in widespread Retro assessments. Instead, the PAF's (and Developed Losses) will end up at whatever lower level they need to be so that overall percentage Retro refunds will be the same as if there had been no rate decrease.
10. Performance adjustment factors have always been less than 1.00. Theoretically, they could be greater than 1.00, but never have been. This means that developed losses have been lower and aggregate refunds have always been higher than they would have been without this process. The most likely scenario that would generate PAF's larger than 1.00 would be if base rates for up-front premiums were much higher than they needed to be. Higher PAF's would then be needed to again ensure that the aggregate refund was appropriate (based on retro vs. non-retro performance).
11. Getting claims closed prior to its Retro valuation date can have a big impact on its developed losses. An open claim with $10,000 in costs paid to date, but with a $75,000 case reserve, might develop to around $150,000. The same claim, though, closed with only $15,000 in costs might develop to around only $30,000. If a claim is closed prior to a valuation date, any unspent case reserves are ignored.
12. Developed loss values on individual claims aren't used to calculate an employer's experience factor, which is used to adjust their premium above or below the manual rates for their risk classifications. Developed losses on individual claims are used for Retro purposes only. Only paid costs (for closed claims) or case reserves (for open claims) are used for experience rating.
13. For more information on understanding developed losses, contact one of our financial incentive coordinators.

See also: Glossary of Terms.

Glossary of Terms

See also: Retro Program Rules.

See also: Retro Program Rules.