Canadian Accredited Insurance Broker (CAIB) Three Practice Exam

What does retrospective rating primarily depend on?

1. The insured's claim limits

2. The insurer's market position

3. The insured's loss ratio

4. The type of coverage provided

The correct answer is: The insured's loss ratio

Retrospective rating is a premium calculation method that adjusts the premium based on the insured's actual loss experience during the policy period. This approach means that the final premium is determined after the fact, considering the insured’s losses rather than being fixed in advance based on estimated risks. The correct answer highlights that the insured's loss ratio is critical in this process. A lower loss ratio indicates fewer and less severe claims relative to premium paid, potentially leading to a reduced final premium. Conversely, a higher loss ratio suggests more claims or higher severity, which can result in increased premiums. This dynamic creates a direct link between the insured's past performance in terms of claims and their financial obligation to the insurer in the form of premiums. While other factors are relevant to overall policy considerations, such as the insurer's market position or the type of coverage, they do not directly influence the retrospective rating calculation as significantly as the loss ratio does. Thus, the focus on the insured's loss ratio is essential in understanding how retrospective rating operates within the insurance industry.