Experience rating in workers comp is a calculation that either increases or decreases your premium based on your company's claims (loss history).
Experience rate factors are actually credits or debits that reflect the specific risk's loss experience. They are applied to the premium developed by using manual rates. The National Council on Compensation Insurance, Inc. (NCCI) or another rating organization that has jurisdiction calculates these factors. Experience rating is mandatory for all risks that meet certain eligibility requirements. For example, a risk must be in business under the same ownership for at least two years. Minimum premium eligibility thresholds also apply and vary by state.
Each risk pays its "fair share" of the average annual rate for the class or classes involved based on its own loss experience. The experience may be better or worse than average and the factor determined and applied reflects it. One of the most important consequences of experience rating is that it encourages the named insured to implement loss control, safety, and hazard reduction initiatives that control or reduce losses.
The experience rating factor is calculated using the latest three years of loss experience prior to the current policy period. It excludes the most recent full year. It is recalculated annually by adding the experience for the latest eligible year and dropping the oldest year. The problem with this approach is that it applies historical loss experience to the current policy period in order to predict future losses and results in a time lag in being applied. Effective loss control or safety initiatives implemented today will not impact the premium until at least two years following implementation.