What does experience rating take into account when determining premiums?

Experience rating focuses specifically on the past experiences or the number of losses a policyholder has incurred. This method assesses the individual claims history of a business to help determine its insurance premiums. By analyzing how frequently and severely the insured entity has had losses in the past, insurers can tailor premiums to better reflect the risk that particular policyholder presents. A company that has had a higher number of claims or larger losses may be assigned a higher premium compared to one with fewer or lesser claims, as it indicates a higher likelihood of future claims.

The other options, while they may influence aspects of insurance practices, do not specifically pertain to experience rating. For instance, average industry loss rates provide a broader context but do not tailor premiums to individual policyholder behaviors. Additionally, the number of claims made by the policyholder is related to their experience but is not the sole determining factor; rather, it is the overall impact of those claims over time that matters. Lastly, the current economic environment might influence general market conditions but does not directly affect the underwriting of premiums based on historical loss experience. Understanding experience rating is crucial for policyholders as it emphasizes the importance of loss prevention and management in controlling insurance costs.