Retros were developed so businesses would share the risk and be more focused on risk control. Retros are generally used to finance low-to-medium severity losses that have a relatively high frequency, such as workers compensation, general liability and auto liability.
The advantages of using a retro plan include:
- Lower costs. Costs over the long term tend to be lower because some expenses are saved, particularly the insurer’s risk charge to cover the possibility that losses will be higher than expected.
- Improved risk control. Because of the direct link between premium and losses, retros encourage risk control.
- Reduced uncertainty. The degree to which this is possible will depend on the level at which terms of the plan, such as loss limit and maximum premium, are set.
- Enhanced stability. If the retro includes multiple coverages, thereby diversifying risk, stability can be improved.