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🔄 '''Paid loss retrospective''' is a [[Definition:Retrospective rating | retrospective rating]] plan in which the [[Definition:Premium | premium]] an insured pays is periodically adjusted based on the actual [[Definition:Paid losses | paid losses]] incurred during the policy period, rather than on [[Definition:Incurred losses | incurred losses]] that include [[Definition:Loss reserve | reserves]] for open claims. This structure is most commonly used in [[Definition:Workers' compensation insurance | workers' compensation]], [[Definition:Commercial general liability (CGL) | general liability]], and [[Definition:Commercial auto insurance | commercial auto]] programs for large commercial accounts that have the financial capacity to absorb premium variability. Unlike a [[Definition:Guaranteed cost policy | guaranteed cost policy]], a paid loss retro ties the insured's ultimate cost of coverage directly to its loss experience, creating a powerful incentive to invest in [[Definition:Loss control | loss control]] and aggressive [[Definition:Claims management | claims management]].

⚙️ Under the plan, the [[Definition:Insurance carrier | carrier]] sets a minimum and maximum premium — often called the "floor" and "ceiling" — that bound the insured's financial obligation regardless of how favorable or unfavorable losses turn out. At each adjustment date (typically annually for several years after the policy expires), the insurer recalculates the premium using a formula that applies a [[Definition:Loss conversion factor (LCF) | loss conversion factor]] and a [[Definition:Tax multiplier | tax multiplier]] to cumulative paid losses, then adds a [[Definition:Basic premium | basic premium]] that covers the carrier's fixed expenses and [[Definition:Excess loss premium | excess loss]] charges. Because only paid — not reserved — losses enter the formula, the insured benefits from delaying settlements and controlling the pace at which claims close, though the trade-off is that premium adjustments continue for years as claims mature and payments are made.

📈 Choosing a paid loss retro over an [[Definition:Incurred loss retrospective | incurred loss retrospective]] carries strategic implications for both the insured and the carrier. For the insured, the paid loss approach smooths cash flow in the early years because [[Definition:Claim | claims]] typically pay out slowly, meaning initial adjusted premiums tend to be lower. However, this also means the carrier must finance open claim liabilities with its own capital until payments catch up, which introduces [[Definition:Credit risk | credit risk]] if the insured's financial condition deteriorates before all adjustments are settled. Carriers mitigate this exposure through [[Definition:Letter of credit | letters of credit]], [[Definition:Collateral | collateral]] requirements, or [[Definition:Surety bond | surety bonds]]. For sophisticated risk managers, the paid loss retro remains one of the most flexible tools in the [[Definition:Alternative risk transfer (ART) | alternative risk]] toolkit — rewarding disciplined organizations with lower long-term insurance costs while keeping the insurer's balance sheet engaged in managing [[Definition:Long-tail liability | long-tail]] claim outcomes.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Retrospective rating]]
* [[Definition:Incurred loss retrospective]]
* [[Definition:Loss conversion factor (LCF)]]
* [[Definition:Basic premium]]
* [[Definition:Guaranteed cost policy]]
* [[Definition:Large deductible program]]
{{Div col end}}

Definition:Paid loss retrospective - Revision history

PlumBot: Bot: Creating new article from JSON