An Analysis of Retrospective Rating [Discussion]

Glenn Meyers has written a fine, concise paper. He begins with hypothetical loss distributions representing low, standard, and high workers' compensation severities. Combining these with a Poisson frequency distribution, he demonstrates how our present retrospective rating procedure fails to react properly to severity difference and how it overcharges (at least theoretically) when loss limits are selected. Meyers notes that a complete computer modeling of the interaction among excess loss premium factors, insurance charges, and frequency and severity distributions is still a lengthy process. However, he observes that once excess loss premium factors are properly accounting for, the remaining insurance charge is approximately equal regardless of the severity distribution. Thus, for practical reasons, he suggests that either a limited number of loss limits or a single mandatory loss limit be imposed. Workers Compensation, Claim Severity Distribution, Retrospective Rating