Evaluating Contingent Premium Liabilities for Excess-of-Loss Swing Plans

Swing Plans - or retrospectively rated contracts with maximum and minimum final premiums - are commonplace I excess-of-loss reinsurance treaties. Key provisions include the provisional premium, maximum and minimum premiums, an aggregate deductible, the loss conversion factor for claims in the reinsured layer, and the attachment point itself, which is usually indexed. It is not uncommon to find an attachment point for multiple defendant cases which is different than that for single defendant claims. the minimum premiums can operate in one of two ways - the "Subject to" minimum or the "Minimum Plus" variation. Swing plans create a contingent premium liability for the reinsured carrier. Using medical professional liability as the illustrative line of business, this paper’s objective is to (a) review the basic retro-rating fundamentals to develop a "probable final" swing premium concept and (b) derive an approximation to the underlying excess layer probability distribution, using a Monte Carlo model, to be employed in the determination of the probable final premium.