Generally, individual rating is done for various reasons, such as the price charged to large risks are more accurate, or to encourage and motivate more risk control programs, or to reflect the modification, if any, in the product/cover designed specially
The individual risks that are large enough to extend some credibility with their experience , can be considered for individual rating.
There are two types of individual risk rating systems. They are (a) prospective system – this system uses the past experience to determine the costs of coverage for the future and (b) retrospective system – this system uses the actual experience of the period to determine the final cost of that period.
The retrospective system is more responsive to experience change than the prospective system. However, this system is less stable as experience is more volatile, but can motivate the insured to implement additional risk control programs.
All individual rating systems consider both experience and change in exposure, if any, when the rating is done. Wherever credibility factor exists, experience indicator is used whereas where necessary experience is lacking, exposure indicator is used.
Courtesy : General Insurance Underwriting Book published by Sashi Publications
