What Are Experience Ratings in Insurance

Experience ratings compare an insured party’s past loss history with that of similar insureds to estimate future risk. They are most commonly used in workers’ compensation insurance and form the basis of an experience modification factor (modifier) that adjusts a policyholder’s premium.

Key points

Experience ratings measure a policyholder’s losses relative to peers in the same industry and size.
Insurers use experience ratings to predict claim likelihood and set premiums accordingly.
The experience modifier adjusts annual premiums: greater than 1 raises premiums, less than 1 lowers them, and 1 means average loss experience.
Ratings are typically based on the prior three years of loss experience and are recalculated annually.

Why experience ratings matter

Experience ratings align premium costs with actual risk. By charging higher premiums to policyholders with worse-than-average loss histories, insurers protect themselves from excess payouts. At the same time, higher premiums encourage businesses to invest in safety and risk-management practices to reduce future claims and lower their modifier.

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How experience modifiers work

Data window: Insurers usually review the most recent three years of losses (excluding the current policy year) to compute the modifier.
Annual recalculation: Modifiers are updated each year to reflect recent claims.
Interpretation:
Modifier = 1.0 → Loss experience is average; premiums generally remain unchanged.
Modifier > 1.0 → Loss experience is worse than average; premiums increase.
Modifier < 1.0 → Loss experience is better than average; premiums decrease.
Application: The modifier multiplies the standard premium for the policy period to arrive at the adjusted premium.

Example

A construction firm with a higher-than-expected number of workers’ compensation claims over the prior three years will receive a modifier greater than 1.0. That modifier increases the firm’s upcoming premium, creating a financial incentive to improve safety and reduce future claims. Conversely, a firm with fewer-than-expected claims receives a modifier below 1.0 and pays a lower premium.

How policyholders can improve their rating

Implement and enforce workplace safety programs and training.
Track and investigate incidents to prevent recurrences.
Return injured employees to work as soon as medically appropriate (light-duty programs).
Review payroll and classification accuracy to avoid misclassifications that inflate premiums.
Work with brokers and insurers to verify claim handling and contest erroneous claims when appropriate.

Takeaway

Experience ratings tie insurance cost to a policyholder’s actual loss history, encouraging safer practices while helping insurers price risk more accurately. Monitoring claims, improving safety, and managing workplace incidents are the primary ways businesses can reduce their experience modifier and lower premiums.