What does the term "prospective" imply in ratemaking?

The term "prospective" in ratemaking indicates a forward-looking approach that focuses on predicting future expected costs and risks associated with providing insurance coverage. This perspective is crucial for insurance companies as they set premiums that will adequately cover future claims and operational costs, ensuring that they remain solvent and can meet policyholder obligations.

Using prospective data, insurers analyze trends, potential changes in regulations, economic factors, and advancements in risk assessment to make informed decisions about pricing. This contrasts with retrospective methods, which primarily rely on historical data. Being prospective allows companies to adapt to evolving circumstances and market dynamics, ensuring that their pricing strategies are not only reflective of past losses but also aligned with what they anticipate encountering in the future.