Experience rating

Experience rating prices a layer from the losses actually incurred in the cedant's portfolio, generally over five to ten years. Past losses are first brought onto the conditions of the year being priced by three successive adjustments: indexation, correcting cost inflation; rebasing on exposure, correcting portfolio growth; and development, projecting still-open claims to their ultimate cost. The layer structure is then applied to this adjusted history to obtain the average annual cost, of which burning cost is the simplest form. The problem it solves is specificity: no market model knows a given cedant's underwriting policy, and its own history is the only source that reflects it. The limit is statistical credibility: on a high layer hit twice in ten years, history says almost nothing, and that is where exposure rating takes over, the two methods being combined by a credibility weighting that depends on the height of the layer.

An actuary prices a 5 million xs 2 layer in 2026. Over ten years, eight losses would have hit it, for 21.4 million euros in original values. After indexation at 4 percent a year and rebasing on exposure that has grown 62 percent, the adjusted burden reaches 38.9 million, a burning cost of 3.89 million a year. Loaded 22 percent for expenses and margin, the technical price comes to 4.75 million.

Experience rating, Tarification par l'historique, Burning cost rating, Tarification expérience