Legal Definitions - experience rating

Experience rating is an insurance method used to determine the cost of an insurance policy by analyzing a policyholder's past claims history, also known as their "loss record." Insurers use this historical data to assess the likelihood of future claims and the potential financial impact of those claims. This allows them to adjust the premium to more accurately reflect the specific risk profile of the individual or entity being insured.

• Imagine a large trucking company that has maintained an impeccable safety record for the past five years, with very few accidents or cargo damage claims. When their commercial auto insurance policy is up for renewal, their insurer will apply an experience rating. Because their past "experience" demonstrates a low frequency and severity of losses, the insurer will likely offer them a significantly lower premium compared to a similar trucking company with a history of frequent accidents. This illustrates how a positive claims history directly translates into reduced insurance costs.

• Consider a manufacturing plant that has invested heavily in workplace safety programs, ergonomic equipment, and employee training, resulting in a substantial reduction in workplace injuries over the last decade. For their workers' compensation insurance, the insurer will use an experience rating to evaluate this excellent safety performance. This favorable experience rating will likely lead to a reduced premium, as the insurer perceives a lower risk of future costly injury claims due to the company's proven commitment to employee well-being.

• A chain of retail stores has implemented state-of-the-art security systems, fire suppression technology, and robust maintenance schedules across all its locations, leading to a consistent record of no major theft, fire, or water damage claims for many years. When renewing their commercial property insurance, their insurer will apply an experience rating. This strong history of preventing losses demonstrates a lower risk profile, enabling the insurer to offer a more competitive premium rate than they would for a business with a history of frequent property damage claims, even if both businesses have similar assets.