What does "experience rating" refer to?

Experience rating refers to a method of determining premiums based on an individual's or group's claims history. This approach assesses the actual claims that have been made over a previous period and adjusts future premiums accordingly. Essentially, if a group or individual has a history of higher claims, their premiums may increase, whereas those with lower claims may benefit from lower premiums. This method is particularly common in group health insurance plans where the risk profile can fluctuate significantly based on the group's health experiences over time.

This concept allows insurance companies to tailor premiums more closely to the risk presented by the insured, making it a fairer system for both parties. It contrasts with a more generalized rating system based on broader factors, such as age or standardized risk assessments. By focusing on specific claims data, experience rating provides a direct linkage between premium costs and actual usage of health services, aligning the interests of both the insurer and the insured.