What does the experience modification factor adjust according to?

The experience modification factor is a critical metric used primarily in workers' compensation insurance to adjust premium rates based on the loss experience of a business compared to others in the same industry. It takes into account the frequency and severity of past claims, allowing for a more tailored premium that reflects the specific risk associated with the business's actual claims history.

When a business has fewer or less severe claims than average, its experience modification factor will be less than one, potentially leading to lower premiums. Conversely, if the business has a higher frequency or severity of claims, it may have an experience modification factor greater than one, resulting in higher premium costs. This adjustment helps ensure that companies are paying insurance premiums that are commensurate with their individual risk profiles as opposed to relying solely on broad industry averages.

The other options do not directly relate to this specific adjustment mechanism. Competitive rates refer to what the marketplace offers and do not take into account an individual business's claims experience. Market trends may influence overall pricing but are not the basis for adjusting premiums based on individual loss history. Insurance regulations set the legal framework for how insurance operates but do not dictate adjustments specifically based on a business's loss experience.