An insurer uses a merit rating method to alter vehicle insurance premiums depending on the driver’s driving record.
What exactly does merit rating mean?
1: the process of calculating an insurance premium for a specific risk based on its distinct loss-causing qualities experience rating may be viewed the ranking of an individual based on a systematic examination of his work proficiency
Experience Modifiers and Merit Scores Experience Modification and Merit Ratings If a company’s workers’ compensation premium falls below a specified level (usually $5-$10,000 and determined by the rating agency), they may obtain a “Merit” rating. The Merit rating is a scheduled rating element that changes the company’s premium by 5 percent (credit or debit factor) based on their experience.
- In the event that they do not qualify at all (NQ), they are deemed neutral.
- If a company’s Workers’ Compensation premium exceeds the state’s minimum, it is eligible for Experience Rating and receives an Experience Mod.
- The Exp Mod is a numeric rating factor that changes a company’s workers’ compensation premium depending on its prior experience.
A Mod of 1.00 would be “par.” A 1.10 would represent a 10% gain, while a 0.900 would represent a 10% drop. The rating is determined by the state’s relevant rating agency and applies to a company’s workers’ compensation premiums regardless of the insurer.
| 3 Years of Experience | Excluded Year | Rating Year | ||
| 1/1/13 | 1/1/14 | 1/1/15 | 1/1/16 | 1/1/17 |
Experience Modifications often have a limit. In PA, the maximum’swing’ a Mod may have in any way is 25%. Therefore, if their Mod is 1.00, it can climb to a maximum of 1.25 and fall to a minimum of 0.75. In addition, the rating computation “weights” the Mod rating by the quantity of exposure (payroll).
Simply put, this establishes a restriction on how low a Mod may go dependent on the size of the business, the “minimum mod” of the firm. Two firms with identical histories and zero losses can and will come at different Exp Mods if their payrolls vary significantly. A firm with a larger payroll, such as $100k in premiums, will eventually have a lower Exp Mod than a business with the same experience but just $10k in premiums.
Similar to comparing a heavyweight and a flyweight fighter, the flyweight can only exert a certain amount of force to ‘drive down’ the Mod. The heavier weight has the benefit in this situation, but they must also handle a greater total risk, which is their (possible) reward: Experience Modifiers and Merit Scores
Why is merit grading so essential?
Merit Rating should: 1. —Record the development of personnel in their positions, their strong and weak areas, and their relative worth to the organization in order to reward their individual merit appropriately (by promotion) or to replace them in order to get better work done (by transfer or layoff).2.