What requires that the retrospective rated premiums reserve be calculated for each individual risk by applying the appropriate retrospective rating formula to each plan?

Question

Options

• AAccuracy method
• Binventory method
• CAudit premium
• DEndorsement

• A
  4% (1)
• B
  74% (20)
• C
  15% (4)
• D
  7% (2)

Explanation

Inventory method is correct because it specifically mandates a risk-by-risk calculation of retrospective rated premium reserves - each individual policy is evaluated by applying its own retrospective rating formula and plan parameters, rather than using aggregate or sampling-based approaches. This granular treatment ensures that the unique retro plan features (basic premium, loss conversion factor, maximum/minimum premiums) for each insured are properly reflected in the reserve.

Accuracy method is wrong because it refers to an approach that uses statistical or aggregate estimation techniques to approximate reserves, not individual risk-level formula application. Audit premium is a distractor referring to the final earned premium determined after auditing actual exposure (e.g., payroll), which is an input to retro calculations - not the reserve methodology itself. Endorsement is simply a policy modification document and has no connection to reserve calculation methods.

Memory tip: Think of "inventory" as literally taking stock of every item on a shelf - one by one. The inventory method does exactly that: it "inventories" every individual risk and runs the retro formula on each one separately, leaving no policy unexamined.

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