The Experience Rating Plan
The Experience Rating Plan offers a method for modifying the cost of insurance for all but the smaller employers to match the characteristics of an individual employer. Experience rating groups all insureds according to their business operations or classification, adds together the losses of the groups, and obtains an average cost for the groups.
In worker's compensation experience rating the actual losses of the individual employer are determined over a period of time, usually three years. The losses are capped which makes the frequency not severity of losses more important for determining experience rates. This experience is then compared or contrasted with the average as reflected by the rate or rates that apply to the employer's business. If the employer has better than average costs, then he is awarded a credit, while poorer than average experience carries a debit rating. Experience rating takes average loss experience (rates), and modifies it by the individual employer's own loss experience.