Experience Rating and Merit Rating for Exam STAM

Experience Rating

Experience rating modifies an insured's premium based on their own loss history relative to expected losses. The experience modification factor typically uses a credibility-weighted blend: M = Z times (actual loss ratio / expected loss ratio) + (1 - Z) times 1. The credibility weight Z depends on exposure size. Larger risks receive more credibility and therefore more premium adjustment for favorable or unfavorable experience. This approach provides incentive for loss control while maintaining rate adequacy.

Merit Rating and Schedule Rating

Schedule rating adjusts premiums based on observable risk characteristics not fully captured by class rating. Debits and credits are applied for factors like building construction, fire protection, housekeeping, and management quality. Each factor has a range of possible modifications. Unlike experience rating, schedule rating is prospective and based on current conditions rather than past losses. Exam STAM tests both methods, asking you to calculate experience modifications using credibility formulas and to understand how schedule rating complements class and experience rating.