How is Experience Rating calculated?

Experience Rating is computed through a combination of factors that account for a company's past claim history relative to the industry standards. This process is primarily rooted in the experience modification factor, which allows insurers to adjust workers' compensation insurance premiums based on the company's loss history compared to that of the industry.

The system uses classifications, which categorize businesses based on the type of work they do and their associated risk levels. This classification system, combined with the size of the payroll, helps determine the base premium for workers' compensation insurance. The experience modification factor, calculated from the company's historical claims data, then adjusts this premium, increasing or decreasing it depending on whether the business has had more or fewer claims than expected based on its payroll and classification.

This multifaceted approach focuses not only on the industry as a whole but also on the individual company's performance, making it an effective way to price risk in workers' compensation insurance.