In experience rating, which years are used?

In experience rating, which years are used?

• A. The past year only
• B. The three prior years excluding the past year
• C. Five years
• D. The current year only

Answer: (B)

Experience rating uses a set window of historical losses to set the premium, so the rating reflects past, not current, performance. The years included are the most recent three completed calendar years before the rating year. Loss data from the current year isn’t used because it isn’t fully developed yet and can be volatile. So, the three prior completed years are used to determine the experience modification. Using only the past year would give too little data to produce a reliable modifier. Using five years would bring in more history than needed and could dilute relevance. Focusing on the current year would ignore available historical experience altogether.

Experience rating uses a set window of historical losses to set the premium, so the rating reflects past, not current, performance. The years included are the most recent three completed calendar years before the rating year. Loss data from the current year isn’t used because it isn’t fully developed yet and can be volatile. So, the three prior completed years are used to determine the experience modification.

Using only the past year would give too little data to produce a reliable modifier. Using five years would bring in more history than needed and could dilute relevance. Focusing on the current year would ignore available historical experience altogether.