Businesses with more than 50 employees use which type of rating system to determine costs of premiums?
The correct answer and explanation is:
The correct answer is Experience Rating.
Experience rating is a system commonly used by businesses with more than 50 employees to determine the cost of premiums for workers’ compensation insurance. The premium cost for such businesses is based on their historical claims data, specifically the frequency and severity of injuries or incidents that have occurred within the company. If a company has a history of frequent claims or severe injuries, its premium rates may increase, while companies with fewer claims may pay lower premiums. This system encourages companies to maintain a safe workplace, as it directly links the costs of workers’ compensation insurance to their safety record.
The experience rating system allows insurance providers to assess the risk posed by a particular business, adjusting premiums according to the actual losses the company has incurred in the past. This can provide a more accurate and equitable pricing model compared to a flat-rate system, where premiums are generally the same for all companies regardless of their safety record.
Experience ratings are typically calculated using a formula that compares a company’s actual claims experience to the expected claims for a business of its size and industry. The result is an experience modification rate (EMR), which is then applied to the base premium rate to determine the final premium. A company with an EMR of 1.0 will pay the standard premium, while those with a higher or lower EMR will see their rates adjusted upward or downward, respectively.
This rating system provides incentives for companies to improve workplace safety and implement risk management strategies to reduce workplace injuries, ultimately lowering their insurance costs.