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Simple English definitions for legal terms
experience rating
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A quick definition of experience rating:
Experience rating: A way to figure out how much someone should pay for insurance by looking at how many times they've had to make a claim in the past and how much money was paid out for those claims. This helps insurance companies decide how likely it is that something bad will happen and how much it might cost them if it does.
A more thorough explanation:
Definition: Experience rating is a method used by insurance companies to determine the amount of premium an insured person or business should pay based on their past loss record. This method helps assess the risk of covered events occurring and the probable damages if they do.
Example: Let's say a small business has been insured for three years. During the first year, they had no claims, but in the second year, they had two claims totaling $10,000. In the third year, they had one claim for $5,000. The insurance company will use experience rating to analyze the business's loss record over the three years to determine the amount of premium they should pay for the fourth year. Based on the business's past loss record, the insurance company may increase the premium to cover the risk of future claims.
Explanation: The example illustrates how experience rating works in practice. The insurance company uses the business's past loss record to assess the risk of future claims and determine the amount of premium they should pay. In this case, the business had two claims in the second year, which increased their risk of future claims. As a result, the insurance company may increase the premium to cover the increased risk.