In which type of rating is class rates adjusted based on individual loss experience?

The correct answer, experience rating, refers to a method in which the insurance premiums are adjusted based on the individual loss experience of an insured entity. This approach takes into account the claim history specific to the particular policyholder, comparing it against the expected loss experience for their class of risk. If a business has had fewer or less severe claims than the average for its category, their premium may be lowered. Conversely, if the loss experience is worse than average, the premium may increase.

Experience rating is particularly common in workers' compensation and liability insurance, where individual performance can significantly impact the overall risk profile. This method encourages insured entities to maintain safety and risk management practices, as better loss records can lead to lower premiums, providing a direct financial incentive for loss prevention efforts.

Class rates and judgment rates differ from experience ratings in that class rates apply standardized premiums for groups of similar risks without taking into account an individual’s specific loss history, while judgment rates are determined by an underwriter's assessment of risk and do not rely on statistical data or a set formula. Merit rating also factors in individual performance but typically in a less direct way than experience rating, focusing more on general trends within a broader category rather than detailed individual loss records.