(IN MOST STATES)
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WHAT IS EXPERIENCE RATING? Experience rating is a procedure utilizing past insurance experience of individual employers to forecast or predict future experience. It is a systematic, mathematical method of modifying future premiums by comparing the actual incurred loss experience of an individual insured to the normal or average expected loss experience for that insured's classification(s) during the experience period. The experience rating formula includes a credibility factor, which reflects the degree of confidence placed in the insured's past experience as a predictor of future experience. The greater the employer's past exposures, the more credible the experience and the greater the impact past experience will have in raising or lowering the experience modification. Under experience rating, insureds that maintained favorable loss levels in prior years receive premium reductions (credit experience modifications), while those with poor past loss experience are charged increased premiums (debit experience modifications). Experience rating relies on the premise that each insured's own past loss history gives a meaningful indication of its probable future experience.
WHY HAVE EXPERIENCE RATING? Implicit in any form of experience rating is the prospect of both debits and credits. Since experience rating offers the prospect of these premium adjustments, it provides an economic incentive for employers to develop safety programs and claims management initiatives. Thus, experience rating benefits both employers and employees by promoting occupational safety and timely return to work for injured workers. Based on extensive historical testing and actuarial methods, experience rating is the best known method for predicting future experience utilizing past experience.
CHARACTERISTICS OF EXPERIENCE RATING In workers compensation experience rating the actual business activity and claim losses of the individual employer are evaluated over a period of time, usually three years. This past experience is then compared with the average as reflected in expected loss rates, which apply to the classification(s) applicable to the employer's business. If the employer has better than average loss experience, the employer is awarded an experience rating credit, while poorer than average experience will produce an experience rating debit. The experience rating formula is more sensitive to loss frequency than to loss severity. As a result, an insured having many small losses can be penalized more than another insured with the same total dollars of losses resulting from fewer, larger claims. There is reason to believe that loss frequency is more susceptible to change by virtue of management's attitudes and other factors, whereas loss severity is more a matter of random chance. |
