Section 4 - Retrospective Rating Plan

The rules contained in this manual apply only to Workers Compensation and Employers Liability Insurance when
written either alone or in combination with other commercial casualty insurance. Refer to the Retrospective
Rating Plan issued by the Insurance Services Office for rules that govern the other commercial casualty
insurance.

A. GENERAL EXPLANATIONS

1. PLAN IS OPTIONAL

   The application of this Plan is optional and may be used only upon election by the insured and acceptance by the insurance carrier.

2. OBJECT OF THE PLAN

   This plan adjusts the premium for the insurance to which it applies on the basis of losses incurred during the period covered by that insurance. The intent is to charge a premium which reflects those losses. Within the principle of insurance, retrospective rating establishes the reasonable cost of insurance by using losses incurred during the term of that insurance and adding the insurance carrier’s expenses and the taxes on premiums.

3. LOSS CONTROL INCENTIVE IN USE OF THE PLAN

   The Plan provides an incentive to the insured to control and reduce losses because the retrospective premium will be the result of losses during the rating period. To the extent that the insured controls losses, there is a reward through lower premiums. The Plan also dispels any concerns the insured may have that its premium depends mostly upon losses incurred by other risks because the greatest part of the retrospective premium is used to pay for the insured’s own losses.

4. COST-PLUS FEATURE OF THE PLAN

   The cost-plus characteristics of this plan exist because the retrospective premium for a rating period is based on the incurred losses during that period, so that it is in the nature of a dollar for dollar cost method. Premium under the Plan is the direct result of such incurred losses because the Plan reflects the cost of losses plus the insurance carrier’s expenses in providing the insurance.

5. EXPERIENCE RATING PLAN MANUAL

   Retrospective rating is an independent option and it is not a substitute for experience rating. Retrospective rating is superimposed upon the premium resulting from experience rating.

6. RISKS NOT SUBJECT TO EXPERIENCE RATING

   For risks not subject to experience rating, retrospective rating premium is based on the premium determined by application of Manual or other authorized rates.

7. RISKS OPERATING IN MORE THAN ONE STATE

   This Plan may be applied on an intrastate or interstate basis.

8. PREMIUM DISCOUNT

   Any standard premium under this Plan is not subject to the premium discount provided in Rule VII of the Basic Manual for Workers Compensation and Employers Liability Insurance. The reason is that premium discount recognizes variations in issuing and servicing expenses whereas retrospective rating incorporates those elements by means of the factors used to compute premium under this Plan.

9. SCHEDULE (Y) AND SCHEDULE (X) EXPENSE RATIO TABLES

   The Plan includes tables of expense ratio to be used by each company in accordance with the expense table adopted by the company. They are in Part Four. Such tables are required only for Rating Option V described in Part Two-II-“Retrospective Rating Options”. The purpose of the Schedule (Y) and Schedule (X) expense tables is to indicate the amount of premium for company expenses, profit or contingencies, but not taxes. The total amount for such expense is determined by multiplying the standard premium of the risk by the factor for that size premium in the Table of Expense Ratios.NOTE: Schedule (Y) and Schedule (X) expense ratio tables are often referred to as representing the stock and non-stock systems of company expenses respectively.

10. INCREASED LIMITS FOR EMPLOYERS LIABILITY

    If the policy provides increased limits for Part Two, such premium and incurred losses may be subject to the Plan.