Experience Refund

What Does Experience Refund Mean?

An experience refund is a portion of the profits from an insurance policy returned to a policyholder whose claims have been lower than the coverage they paid for over the policy period. The term also refers to money refunded to a ceding company by a reinsurer when claims fall below the actuarial projections.

Insuranceopedia Explains Experience Refund

Insurers charge higher premiums to policyholders who present greater risks in order to mitigate potential financial losses. Conversely, they offer incentives to policyholders who have not incurred significant claims costs, with the experience refund being one such incentive. Some life insurance products are built around a similar idea, where a participating life insurance policy pays dividends to holders when the insurer’s claims and investment results come in better than expected.

When an insurer issues a policy, they project the amount it will need to pay in claims over the policy term. If the actual claims costs are lower than anticipated, the insurer may return a portion of the profits generated from that policy to the policyholder. Experience refunds turn up most often in commercial coverage like workers compensation, where insurers monitor each business’s claims history and may return part of the premium when losses come in under the projected amount.

Similarly, if a ceding company experiences claims that fall below expected levels, it may refund a portion of the premiums to the insurance company it has reinsured.