Fundamentals of Individual Risk Rating, Part II

In the simplest case, the Standard Premium for an insured is the manual premium adjusted by its experience rating modification. This is the best prospective estimate of the correct individual risk premium, but with expenses at a flat proportion of premium, appropriate for a small risk. As risk premium sizes increase, there is a gradation of expenses, so that expense becomes a lower proportion of the larger risk premiums. This is reflected in manual rules by a series of premium discount rates which increase with increasing layers of premium. If the risk is not retro rated, it will pay the Standard Premium less the discount, which is called Guaranteed Cost Premium. If retro rating is selected, the discount will be realized as a reduction to expenses in the basic premium. What the risk finally pays, in either case, is called the net premium.