What does a retrospective rating charge reflect?

A retrospective rating charge is designed to adjust the premium an insured pays based on the actual losses incurred during the policy period. This type of rating system is commonly used in workers' compensation and liability insurance. The core idea is that the final premium will reflect the actual cost of risk associated with insuring the business over time.

The retrospective rating approach allows businesses to benefit from lower costs if they have fewer claims or lower losses, thus aligning the premium more accurately with the risk presented. The charge itself incorporates the actual losses a company experiences, effectively making the insurance premium reflective of real-world scenarios rather than estimates.

By shifting the focus onto actual claims and losses, retrospective rating encourages better risk management and loss prevention practices among policyholders. This strengthens the relationship between insurance costs and genuine risk exposure.