What Does Prospective Rating Mean?
Prospective rating is a method used by insurance companies to establish:
- The insurance premium in future years.
- The premium of an insurance policy for a specified period of time in the future.
It is dependent on the losses that have happened in the previous years. Prospective rating uses different tools such as schedule credits and individual risk rating. If losses are incurred during the policy period, they do not have any effect on the final premium. An example of prospective rating in insurance plans is the guaranteed cost plan, which can come with or without dividends.
Insuranceopedia Explains Prospective Rating
Prospectively rated groups use a portion or all of their claims in establishing the premium rates. The renewal rates of insurance policies are established by reviewing historical claims experience. The rate established is then applied and adjusted to future policy periods.
For instance, if a group is large enough and has coverage for a long period of time, the insurance company will base the future premium rate on the group’s claims experience. Experience rating is applied to groups that have 20 members or more. Larger groups can benefit from this type of arrangement, as they often end up paying lower premium rates than other groups. Smaller groups, on the other hand, are often blended with the manual rates imposed by the insurance company.