What characterizes a retrospective premium arrangement in group insurance funding?

A retrospective premium arrangement in group insurance funding is characterized by the mechanism where the final premium paid by the employer is determined after the policy period ends, based on the actual incurred losses. This means that the initial premium is essentially an estimate, and adjustments are made at the end of the policy year to reflect the actual claims experience of the group.

If the claims are higher than expected, the employer may be required to pay additional premiums. Conversely, if the claims are lower than expected, the employer might receive a refund. This type of arrangement aligns the cost of insurance with the actual risk profile and claims experience of the group, allowing for adjustments based on real data rather than fixed projections. Such a system incentivizes employers to engage in effective risk management practices to keep claims lower, as it can lead to reduced costs in the form of premium refunds.