What is Experience?

In the context of insurance, experience is the number of losses that an insured party has encountered in comparison to the losses of similar insured parties. An insurer can use experience ratings, or modifiers, to determine the probability that an insured will file a claim. Experience ratings are often taken into account by workers' compensation insurance. Workers' compensation premiums, for example, are calculated using an experience rating.

Key Takeaways

• An insured party's experience is a rate calculated by considering the number of losses it has experienced in relation to other insured parties.
• By examining a policyholder’s experience, an insurance company can estimate the likelihood of future claims and risks and therefore establish changes in the policy premium.
• The insurer's premiums will be higher for policyholders who have experienced more losses and risks.

Understanding Experience Ratings

Experience modifiers take a close look at a policyholder’s last three years of insurance activity and compare it to the historical loss of similar policyholders. By considering experience ratings, insurers operate under the assumption that future losses will follow similar patterns to previous ones.

For instance, an insurance company will determine whether a company has filed more workers’ compensation claims than other similar companies. If that specific company produces more claims, the insurance may adjust accordingly and choose to increase premiums.

In a sense, this system allows insurance companies to reward companies with fewer workplace incidents. Moreover, it protects insurers from riskier policyholders and incentivizes companies to minimize losses.

Calculating Experience Ratings

A typical experience rating is calculated on a yearly basis. It relies on a three-year period beginning three years prior to your most recently expired benefit period. Your experience rating can be less than, greater than, or equal to 1.

When your experience modifier is designated as 1, it means that your loss experience is typical for your industry group. In other words, your annual premium will not change since your loss history is no better or worse than others in your industry. A modifier greater than 1 indicates that your loss experience is worse than average for your industry group and as a result, your premium will increase. If your modifier is less than 1, your loss history is better than average and you qualify for a reduced price on your premium.

Bottom Line

Experience ratings play a crucial role in determining insurance premiums. Understanding how experience ratings work and how to reduce them can be complicated, but it can lead to significantly lower premiums. To lower your experience modifier, minimizing the frequency and severity of claims is key, as well as reporting claims on time. If you want to learn more about how to properly maintain your experience rating, contact an experienced insurance attorney.