Experience rating is a pricing method that adjusts premium based on the insured’s own prior loss results instead of relying only on class averages. In plain language, it moves pricing closer to the account’s actual claim history.
How it works
Experience rating usually starts with a manual rate based on class, territory, or other broad factors. The insurer or rating organization then reviews the insured’s own loss experience and applies an adjustment, often through an experience modification factor.
Because data quality matters, experience-rating systems also use credibility rules. A very small account usually cannot be priced as heavily on its own results as a large account with years of stable claim data.
Why it matters
This method helps insurers price risk more precisely and gives policyholders a direct financial incentive to improve safety, return-to-work programs, and claim management.
Experience rating does not decide whether a specific claim is covered. It changes price, not coverage.
Practical example
A workers compensation account has a manual premium of $100,000. Its experience modification factor is 1.15 because past losses were worse than expected. All else equal, the experience-rated premium rises to $115,000.