Property and Casualty Insurance Practice Exam

What does Experience Rating modify?

1. The manual premium based on current market trends

2. The premium based on the insured's past loss experiences

3. The policy coverage limits available

4. The claims process procedures

The correct answer is: The premium based on the insured's past loss experiences

Experience rating is a method used in the insurance industry that adjusts premiums based on the insured's past loss experiences. This technique takes into account the historical loss data of the policyholder, allowing for a more personalized premium that reflects their risk profile. If an insured has had a higher frequency or severity of losses in the past, the experience rating will typically result in a higher premium. Conversely, if the insured has a good loss history with fewer or less severe claims, they may benefit from reduced premiums through this rating method. This approach serves to incentivize policyholders to maintain safer practices and potentially reduce the occurrence of future claims, as they understand their past behavior directly influences their insurance costs. Therefore, the modification of premiums based on past losses is a crucial aspect of how insurers manage and regulate risk within their portfolios.