Accrued Retrospectively Rated Premiums by Individual Policyholder Account

The literature that the author has seen to date, Berry[1] and Perkins & Teng[2], concerning the accrued retrospectively rated premium focuses on calculating the asset in bulk by policy year, but not by policyholder account. In order to derive the asset by individual policyholder account, the bulk asset would have to be allocated after the fact. Another way to view this process is to first allocate (or calculate) the ultimate loss and allocated loss adjustment expense by individual policy and then calculate the resulting accrued retrospectively rated premium by individual policyholder plan or account. Such an approach would have strong intuitive appeal, since average retrospective rating parameters may change over time due to market pressures or a changing mix of business. This paper describes a method that was developed to calculate the accrued retrospectively rated premium using this approach.