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Experience rating

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Experience rating is a method used by insurers to determine pricing of premiums for different groups or individuals based on the group or individual's history of claims. The experience rating approach uses an individual's or group’s historic data as a proxy for future risk, and insurers adjust and set insurance premiums and plans accordingly.[1]

Examples

Unemployment insurance is experience rated in the United States; companies that have more claims resulting from past workers face higher unemployment insurance rates.[2] The logic of this approach is that these are the companies that are more likely to cause someone to be unemployed, so they should pay more into the pool from which unemployment compensation is paid.[3] Unemployment insurance is financed by a payroll tax paid by employers. Experience rating in unemployment isnurance is described as imperfect. Rosen, Harvey S. (2008). Public Finance. New York, New York: McGraw-Hill/Irvin. p. 293. ISBN 978-0-07-351128-3. If a worker is laid off, generally the increased costs to the employer due to the higher value of unemployment insurance tax rates are less than the UI benefits received by the worker. Rosen, Harvey S. (2008). Public Finance. New York, New York: McGraw-Hill/Irvin. p. 293. ISBN 978-0-07-351128-3.


References