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

Risk

Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

, and insurers adjust and set insurance premiums and plans accordingly.

Examples

Unemployment insurance is experience rated in the United States; companies that have more claims resulting from past workers face higher unemployment insurance rates. 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. Unemployment insurance is financed by a payroll tax paid by employers. Experience rating in unemployment insurance is described as imperfect. 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.