Masonry Magazine September 1967 Page. 16
Insurance for Contractors
find it difficult to buy insurance any other way, because there is a degree of protection for the company built into most of these plans, specifically, the difference between standard and maximum premium. To explain how they work, we should first define some terms:
Manual Premium - The premium developed by manual rates applied to units of exposure; that is, payroll, contract cost, gross receipts or number of vehicles.
Standard Premium - Manual premiums plus credit or debit factors produced by Experience Rating Plans. In theory, the same as premium developed under Guaranteed Cost Policies.
Basic Premium - A percentage of the standard premium retained by the company to cover acquisition costs, general administration, safety engineering, audit expenses, company profit, loss limitation charges, etc.
Incurred Losses - Amounts paid and held in reserve by the insurance company, sometimes limited to maximum amounts chargeable because of any one claim or accident.
Loss Conversion Factor - A percentage loading added to incurred losses to cover claim investigation and adjustment expenses.
Tax Multiplier - A fixed percentage factor designed to cover premium taxes regulated by the individual states involved.
Minimum Premium - A percentage of the standard premium designed to fix the lowest possible premium under Retrospective Rating.
Maximum Premium - Conversely, the highest premium possible under Retrospective Rating, regardless of losses, expressed as a percentage of the standard premium.
Loss Limitation - The maximum amount chargeable under the Plan because of any one claim or accident, where such limitation applies. The charge for limiting losses is sometimes indicated separately, sometimes included in the basic premium factor.
Making use of these terms, we can state the formula for determining the final Retrospective premium after expiration of such policies:
Basic + (Incurred X Loss Conversion) X Tax Retrospective
Premium (Losses Factor) Multiplier Premium
Most plans call for evaluation of losses and adjustment of premium six months after expiration of the policy and annually thereafter. Final premium determination may be delayed by agreement until all claims have been closed.
Example No. 1- One Year Plan
Manual Premium $15,000
Experience Modification (20% Credit) .80
Standard Premium $12,000
Basic Premium 20% of $12,000 or $ 2,400
Minimum Premium 50% of $12,000 or $ 6,000
Maximum Premium 135% of $12,000 or $16,200
Loss Conversion Factor 1.14 x Losses
Tax Multiplier 1.03
Repeating our formula, then, the following losses would produce Retrospective premiums as indicated:
Basic + (Incurred X Less Conversion) X Tax Retrospective
Premium (Losses Factor) Multiplier Premium
A. $2,400 $ 8,114 1.14 1.00 $12,000
B. $2,400 $ 3,004 1.14 1.03 $ 6,000
C. $2,400 $11,691 1.14 1.03 $16,200
Retrospective plans may also be written for a period of three years or for the duration of one particular project, as in the case of a joint venture. In general, three year plans provide a greater degree of protection to the insurance company than one year plans and, in return offer more attractive basic, minimum and maximum premium factors to the insured. In the long run, they often provide insurance protection at the lowest cost possible, but it is impossible to state flatly which is better for everybody; too much depends upon the amount of losses incurred by policy year.
The premium penalty for cancellation of a three year plan by the insured before expiration is severe, a necessary inducement to continue the agreement once made, regardless of loss experience.