Massachusetts Health & Accident Insurance Practice Exam

A retrospective premium arrangement can lead to what at the end of the year?

1. Guaranteed additional coverage

2. Refund or additional premium based on incurred losses

3. Fixed rates for the upcoming year

4. Immediate eligibility for new participants

The correct answer is: Refund or additional premium based on incurred losses

A retrospective premium arrangement is a unique feature in some insurance policies that ties the premium to the actual losses incurred during the policy period. At the end of the year, the insurer assesses the losses experienced under the coverage, and based on that assessment, the premium is adjusted accordingly. If the losses are lower than expected, the insured may receive a refund, as they have paid more in premiums than was necessary to cover their actual exposure. Conversely, if the losses turn out to be higher than anticipated, the insured may be required to pay additional premium to cover the increased risk represented by those losses. This structure encourages both the insurer and the insured to be mindful of loss control measures throughout the policy period, as better risk management can lead to savings for the insured. Thus, the ultimate financial outcome at the end of the year can be a refund or an additional premium based on the incurred losses, aligning perfectly with the answer given. In this context, guaranteed additional coverage, fixed rates for the upcoming year, and immediate eligibility for new participants do not accurately reflect the characteristics or outcomes of a retrospective premium arrangement.