Experience rating
A method pricing a layer from the cedant's own loss history, adjusted and projected forward.
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 to the conditions of the year being priced through three successive adjustments. Indexation corrects for cost inflation, rebasing on exposure corrects for portfolio growth, and development projects still-open claims to their ultimate cost. The layer structure is then applied to this adjusted history to get the average annual cost, of which burning cost is the simplest form. The method addresses specificity. No market model knows a given cedant's underwriting policy, and the cedant's own history is the only source that reflects it. Its limit is statistical credibility. On a high layer hit twice in ten years, history says almost nothing, and exposure rating takes over. The two methods are then blended with 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 losses reach 38.9 million, a burning cost of 3.89 million a year. With a 22 percent loading for expenses and margin, the technical price comes to 4.75 million.
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