Wheels Insurance, Ltd. has developed an experience rated formula to be used in calculating a member’s premium for each year. It is primarily based on a member’s expected loss history. The following is a brief outline.
The intent of the formula is that each member pays a premium to fund for its ultimate losses, but it allows for risk sharing and risk shifting amongst the entire membership for shock losses.
To develop individual members’ premium, each member’s previous five-year loss history is collected and the data is then trended and developed by Wheels Insurance, Ltd.’s actuarial firm. The actuary then produces what it believes a member’s predictable losses will be, plus what should be reserved for shock losses (losses above $100,000). This becomes the member’s loss fund.
Next, the operating costs of the program such as excess reinsurance, fronting costs, claims service, etc. are calculated for each member.
Finally, the contributions to the loss fund and operating costs are added together, producing a member’s annual premium.
In addition to premium charges, a member can be assessed up to a predetermined amount if its expected losses exceed its contribution for the year.