May 02, 2017 Articles

Resurgence of the Retro Premium

A primer on retrospectively rated insurance premiums and commentary on challenges they present to policyholder counsel

by Katie DeVelvis and Bob Chesler

While most would agree that the recent trend toward consolidation in the insurance industry has affected policyholders in a myriad of unquantifiable ways, at least one development has been decidedly quantifiable—the resurgence of the retrospective premium.

Like any post–merger and acquisition entity, insurance company successors to legacy coverage seek to maximize the value of the deal by identifying business synergies and other ways to reduce costs. What might not be immediately intuitive is that these successor insurer entities are also seeking to increase revenues, despite the fact that many of them are not actively writing new premiums. One major way, made famous by Berkshire Hathaway’s insurance arm, is the float—paid-in premiums that can be invested until claims have to be paid. As of the third quarter of 2016, Berkshire was sitting on over $90 billion of float. While these aren’t profits per se, the funds can be used to fund investment opportunities and generate earnings.

A much less publicized revenue source for insurance company successors to legacy coverage is retrospective premiums. Many have cited insurance market consolidation trends as the reason so many policyholders have recently found themselves on the receiving end of an unexpected retrospective premium bill. The theory goes that the new insurance company gives the claim files a fresh look, finds evidence that policies were retrospectively rated, and begins issuing bills based on an “updated” analysis. Depending on the coverage, premium language, and the size of the underlying liabilities, these bills can range from tens of thousands to tens of millions.

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