Broadly, it constitutes a change in considerations or benefits under an insurance contract that are applicable to all relevant risk subjects to account for the “experience” of the financial security system.

Practically, experience adjustment captures the difference between estimates and the actual amounts relating to premium receipts and insurance service expenses. In other words, calculation of experience adjustment distinguishes between experience adjustments on premiums (and premium related expenses) and experience adjustments on claims and other expenses.

For premium receipts, it measures the difference between the estimate of the amounts expected in a given coverage period, observed at the beginning of the period and the actual cash flows in the period. In addition to premium receipts, calculations take into consideration any relevant cash flows- e.g., those related to insurance acquisition and premium taxes. On the other hand, for insurance service expenses (not including insurance acquisition expenses)- it reflects difference between the estimate of the amounts expected to be incurred in the coverage period, where the estimate is conducted at the beginning of the period, and the actual amounts incurred in the period.

In practice and under relevant standards, experience adjustments on premiums are accounted for as part of the contractual service margin (CSM) if arising from future service and in the statement of income if otherwise. Experience adjustments on claims and non-premium related insurance expenses are fully charged to the statement of income.