Deductible Rating and Retrospective Rating Plans
How deductible credits are calculated and how retrospective rating plans adjust premiums based on loss experience.
Deductible Rating
Large deductible programs allow commercial insureds to retain a portion of each loss. The deductible credit reflects the expected savings from shifting losses below the deductible to the insured. Actuaries calculate these credits using loss elimination ratios (LERs), which measure the proportion of expected losses eliminated by the deductible. LERs depend on the severity distribution of the underlying coverage. Higher deductibles produce diminishing marginal credits because the incremental layer contains less expected loss.
Retrospective Rating Plans
Retrospective rating adjusts the final premium based on the insured's actual loss experience during the policy period. The premium formula includes a basic premium (minimum charge), converted losses (actual losses multiplied by a loss conversion factor), a tax multiplier, and minimum and maximum premium constraints. The plan rewards good experience with lower premiums while capping the insured's exposure through the maximum premium. Actuaries determine the plan parameters to balance risk sharing between insurer and insured.