Experience Refund

Published: | Updated: May 13, 2018

Definition - What does Experience Refund mean?

An experience refund is the portion of the profits from insurance that is given back to a policyholder whose claims are below the coverage they have paid for during the entire policy period. It is also the term used for money returned to a ceding company from a reinsurer for claims that do not exceed the actuarial projections.

Insuranceopedia explains Experience Refund

Insurers charge higher premiums to policyholders who pose a bigger insurance risks as a way of preventing financial loss. Conversely, they also provide incentives to policyholders who haven't cost them much in terms of claims. The experience refund is one of those incentives.

When an insurer sells an insurance policy, they make projections about how much they will have to pay the insured in claims over the course of their policy. When the insured costs the insurer less than expected, they might return part of the profits they made from the policy.

The same goes with a ceding company that deals with claims below the expected amount. They might return a fraction of the premiums to the insurance company they have reinsured.

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