Losses in experience rating are grouped into which two distinct categories?

• A. Small losses and large losses
• B. Primary losses and large losses
• C. Intermediate losses and final losses
• D. Primary losses and excess losses

Answer: (D)

In experience rating, losses are split into primary losses and excess losses. Primary losses are the portion of each claim up to a specified threshold that the rating system uses to measure the employer’s own claim experience; they reflect what the insured is generally responsible for and drive the experience modification factor. Excess losses are the amounts beyond that threshold and typically have little or no impact on the modification factor because very large losses can unduly distort the rating. This separation keeps the rating fair and stable by weighing typical, controllable losses more heavily while limiting the influence of extreme claims.