What factor reduces premiums when loss experience exceeds expectations?

The experience modification factor plays a critical role in adjusting insurance premiums based on a business's past loss experience. Specifically, it is a numerical representation that reflects the claim history of a business compared to its industry average. When a business incurs fewer claims than expected, it results in a lower experience modification factor, thereby reducing the premium. Conversely, if a business has higher-than-expected claims, the factor would increase, leading to higher premiums.

This system is particularly beneficial for businesses that maintain good safety records, as it rewards them with lower insurance costs. By using this factor, insurance companies can more accurately align the cost of coverage with the actual risk posed by the insured entity, making the premiums fairer and based on real performance rather than simply general industry standards.

Other factors, while related to the insurance and premium calculation processes, do not provide the same direct mechanism for adjusting premiums based on historical loss data as the experience modification factor does.