What is the term for adjusting the premium based on the insured's own loss experience?

Experience rating is the term used to describe the adjustment of an insurance premium based on the loss history of the insured. This method assesses the risk associated with a specific policyholder by examining their claims history over a period of time. If the insured has a history of frequent or high-cost claims, the insurance company may raise their premium to reflect the increased risk of future losses. Conversely, if the insured has a good claims history with few or no losses, they may receive a discount or lower premium.

This personalized approach to premium pricing helps insurers align their charges more closely with the actual risk posed by each individual policyholder. This differs from other rating methods where the premiums are based on broader statistical data or general criteria rather than the individual claims history of the insured. For instance, merit rating also considers the insured's risk level but does so in a way that may not solely focus on loss history. Additionally, judgment rating involves a more subjective assessment of risk without directly relying on measurable loss experience, while loss cost rating is based on projected future losses rather than past claims. Therefore, experience rating specifically ties the premium adjustment to the actual incidents recorded in the insured's past.