Experience rating

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Category: Pricing & rating · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed

Experience rating adjusts the manual rate or technical premium for the insured’s own historical loss experience. It applies a credibility-weighted blend of the insured’s actual losses and the expected losses implied by class-rated premium.

Credibility formula

Credibility premium = Z × (Actual experience burning cost) + (1 − Z) × (Expected manual rate)

where Z is the credibility factor (0 ≤ Z ≤ 1), increasing with:

• Number of years of experience available.
• Size of the exposure base (premium, wageroll, sums insured).
• Stability of the claim count distribution.
• Lower variance lines (motor own-damage) attract higher credibility faster than higher variance lines (excess casualty).

Bühlmann credibility

The classical Bühlmann formula:

Z = n / (n + K)

where n is the number of exposure units observed and K is a calibration constant equal to the ratio of expected process variance to variance of hypothetical means.

Practical use

• Motor fleets — bonus/malus on multi-year claims experience.
• Employers’ liability — burning cost approach above a threshold wageroll.
• Workers compensation (US) — formal experience modification factor (e-mod).
• Commercial combined — large-account loss-experience reviews.

References

• Bühlmann, H. and Gisler, A. (2005). A Course in Credibility Theory and its Applications. Springer.
• CAS Study Notes on credibility.
• IFoA. Pricing guides.

Cross-references

• Manual rating
• Schedule rating
• Burning cost

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