How does experience rating work?
Okay, this discussion will get a bit technical. Price setters in the insurance business, underwriters, assess the risk associated with an account and then calculate a premium. They look at factors such as the types of items covered (the schedule) and past losses.
Schedule credits apply to multiple cars, multiple property locations, or supply-chain management factors. Theoretically, it’s unlikely to lose or total damage items at multiple locations in one incident. For a favorable schedule, less risk equals lower premiums.
Low past losses imply good loss control. So a favorable loss history generates an experience discount. The process is known as experience rating.
Usually, the underwriter has access to research which outlines average losses per type of business. These data also indicate how the losses are generated on average – few severe losses or many small losses.
Underwriters fear the frequency of losses more than the severity of any loss. Frequency demonstrates general carelessness and poor risk management. Severity indicates bad luck. So the underwriter tallies total small losses and discounts major losses. This number indicates expected losses. If these are lower than expected, the underwriter applies a discount.
How can a business earn these discounts?
Solid loss control programs help reduce the frequency of claims. An investment in proper protective gear like hard hats, eyewear and work gloves pays dividends in lower premiums.
Good maintenance of equipment, buildings and tools decrease the odds of property losses occurring.
View your loss control program as an employee benefit funded by reduced insurance premiums. The employee benefit requires a company ethic that every employee should get home safe every day. Personal protection items remind the employee to think safety.
When employees know management treasures safety, work becomes more familial. It usually takes about three years for safety programs to prove cost cutting. Get started today.
