How does an underwriter arrive at a rate? Three approaches:
Manual (class) rating: a published rate for a class is applied to every risk in that class.
Merit rating: start from the manual rate and adjust it for the insured's own record. Experience rating, such as a workers' compensation experience modification, is a form of merit rating.
Judgment rating: the underwriter relies mainly on personal experience, usually because the risk is unusual and statistics are thin, such as a one-time drone light show.
Merit rating example: an employer's manual premium is $40,000 and its loss record earns an experience modification of 0.85. The adjusted premium is $40,000 × 0.85 = $34,000. A modification below 1.00 lowers the premium; above 1.00 raises it.
Do not confuse rating methods with refund methods. Pro rata and short rate describe how unearned premium is returned when a policy is canceled. They are not ways of setting a rate.