1. Defi ne Exposure
    Basic unit that measures a policy's exposure to loss´╗┐
  2. What criteria should a good exposure base meet?
    • 1. Directly proportional to expected loss
    • 2. Practical
    • 3. Should consider any preexisting exposure base established within the industry
  3. Describe criteria for Exposure Bases: Proportional to Expected Loss
    • Factor with most direct relationship to losses should be selected as exposure base
    • 1. Also makes exposure base more easily understood by the insured
    • 2. Should be responsive to changes in exposure to risk
  4. Describe criteria for Exposure Bases: Practical
    • Selected base should be well-de fined, objective, and relatively easy and inexpensive to obtain and verify
    • Will be consistently measured

    Note: It precludes policyholders, producers, and UWs from manipulating exposures (MORAL HAZARD - intentional dishonesty to benefit themselves)
  5. Describe criteria for Exposure Bases: Historical Precedence
    • Should carefully consider change in an exposure base prior to implementing
    • * Can lead to large premium swings
    • * Requires a change in rating algorithm
    • * May need data adjustments for future ratemaking analysis
  6. Exposures for Large Commercial Risks
    • 1. Composite Rating
    • 2. Loss-Rated Composite Rating
  7. Describe Composite Rating
    Used for some large commercial risks when difficult to track exposure throughout period

    • Premium calculated normally, then divided by proxy
    • *Audited to determine final premium on expiration
    • *charged prem = # of expected/final proxy units * rate per proxy
  8. Describe Loss-Rated Composite Rating
    Premium is calculated directly from historical losses

    Implicit exposure base is risk itself with expected loss = rate

    Premium = Charged losses + expense load
  9. What are the two methods of Aggregation of Exposures?
    • 1. Calendar Year Aggregation and Accident Year Aggregation
    • All exposures on policies within calendar period
    • Regardless of policy eff ective date
    • Represented graphically by squares
    • **CY ~= AY except for LOB with audits

    • 2. Policy Year Aggregation
    • All exposures on policies with eff ective dates during the year
    • Represented graphically by parallelograms
  10. What are Written Exposures
    Total exposures arising from policies written during a specifi c time period
  11. What are Earned Exposures
    Portion of the written exposures for which coverage has been provided at a certain time
  12. What are Unearned Exposures
    • Portion of written exposures for which coverage has not been provided
    • Amount of exposure company has not yet earned
  13. What are Inforce Exposures
    Number of insured units that are exposed to a claim as of agiven date
  14. What is the common assumption when calculating blocks of exposures?
    • Assume policies written at mid-point of period (24ths method)
    • Good approximation if policies written uniformly during each time period

    Less likely uniform writings assumption holds for longer time frames
  15. Describe Exposure Trend
    • Some lines of business use exposures which are a ffected by time-related influences
    • E.g., payroll and sales revenue are aff ected by inflation
    • May need to measure the exposure trend over time to project exposures at future levels
  16. Selected trends for Exposure Trend can use:
    • Internal insurance company data (e.g., WC payroll data)
    • Industry indices (e.g., average wage index)
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