What Is an Experience Period?

B. Turner
B. Turner

Experience period is a time period used to calculate the premium for an insurance policy. When an insurance adjuster is preparing a premium rate for a customer, he refers to the customer's history during his unique experience period in order to evaluate risk and return. While this period can vary from company to company, it generally refers to the most recent three fiscal years, with the exception of the year that has just ended. For example, the experience period for a customer with a policy coverage period of 1 January 2010 to 31 December 2011 ranges from 1 January 2006 to 31 December 2008. New companies will generally not have any experience or history to evaluate, leading the adjuster to use other methods to determine his premium.

Man climbing a rope
Man climbing a rope

The process of calculating insurance premium rates is left up to skilled mathematicians who specialize in actuarial science. These professionals collect data from a customer's experience period, then use it to calculate the experience modification factor. This figure reflects the customer's expected losses compared to his actual losses during this period. By applying the experience modification factor to the insurance broker's standard premium, the company can customize premiums based on each client's individual risk.

When determining premium costs, only events that occurred during the experience period are considered. Earlier events are no longer included, and events that happened during the year immediately prior to the current one are considered too new or unofficial to include. This explains why an accident impacts an individual's insurance costs for three years, then "falls off" or expires after this time.

In general, customers who represent the lowest risk based on the events of their experience period will enjoy the lowest premium rates. Those who represent a higher risk to the insurance broker are charged more. New firms will not have an experience period to analyze, and this represent an unknown entity to the insurance company. In this type of application, the broker estimates the premium based on the rates given to similar clients. Typically, new customers pay more than existing companies due to their unknown risk factors.

Experience period can be used to determine premiums in almost any type of insurance market. This time period impacts businesses as they purchase workers compensation and general liability coverage. It also affects individuals as they shop for property or home insurance, auto coverage, or even certain types of health insurance.

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