Prospective Rating

What Does Prospective Rating Mean?

Prospective rating is a method used by insurance companies to determine:

• The insurance premium for future years.
• The premium of an insurance policy for a specified future period.

This method is based on losses that occurred in previous years. Prospective rating employs tools such as schedule credits and individual risk ratings. Losses incurred during the policy period do not affect the final insurance premium. An example of prospective rating in insurance plans is the guaranteed cost plan, which may include dividends or not.

Insuranceopedia Explains Prospective Rating

Prospectively rated groups use a portion or all of their claims history to determine premium rates. Renewal rates for insurance policies are set by reviewing historical claims experience, with the established rate applied and adjusted for future policy periods. This approach is common in workers compensation policies, where employers with enough claims history can be rated against their own loss record rather than industry averages.

For example, if a group is large enough and has had coverage for an extended period, the insurance company will base future premium rates on the group’s claims experience. Experience rating is applied to groups with 20 or more members. Larger groups often benefit from this arrangement, as they tend to pay lower premium rates than smaller groups. It’s one piece of how insurers calculate business insurance premiums at renewal, especially for accounts with enough loss data to be credible. Smaller groups, on the other hand, are often subject to blended rates that incorporate the manual rates set by the insurance company.