Experience Refund
What Does Experience Refund Mean?
An experience refund is a portion of the profits from an insurance policy returned to a policyholder whose claims have been lower than the coverage they paid for over the policy period. The term also refers to money refunded to a ceding company by a reinsurer when claims fall below the actuarial projections.
Insuranceopedia Explains Experience Refund
Insurers charge higher premiums to policyholders who present greater risks in order to mitigate potential financial losses. Conversely, they offer incentives to policyholders who have not incurred significant claims costs, with the experience refund being one such incentive.
When an insurer issues a policy, they project the amount they will need to pay in claims over the policy term. If the actual claims costs are lower than anticipated, the insurer may return a portion of the profits generated from that policy to the policyholder.
Similarly, if a ceding company experiences claims that fall below expected levels, it may refund a portion of the premiums to the insurance company it has reinsured.
