Average class rates do not reward the careful or penalize the careless enough. Merit rating adjusts the premium for an individual risk based on its own loss experience or safety characteristics, moving the price away from the pure class rate.

Experience rating uses past claim history; schedule rating uses observable features such as protective devices or management quality. Safe-driver discounts in personal auto are a familiar form of merit rating. The goal is a fairer price and a stronger incentive for loss control.

Credibility limits how far experience can move the rate for small risks. Large risks with stable experience may be almost fully self-rated. Merit-rating plans must be filed and approved in regulated jurisdictions and must avoid unfair discrimination while still recognizing real differences in expected cost.

• Premium adjustment based on individual risk features or experience
• Includes experience and schedule rating
• Encourages loss prevention
• Limited by statistical credibility