- TIA EXAM 5 - WERNER CH 04

Basic unit that measures a policy's exposure to loss

• 1. Directly proportional to expected loss
• 2. Practical
• 3. Should consider any preexisting exposure base established within the industry

• 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

• 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)

• 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

• 1. Composite Rating
• 2. Loss-Rated 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

Premium is calculated directly from historical losses

Implicit exposure base is risk itself with expected loss = rate

Premium = Charged losses + expense load

• 1. Calendar Year Aggregation and Accident Year Aggregation
• All exposures on policies within calendar period
• Regardless of policy effective date
• Represented graphically by squares
• **CY ~= AY except for LOB with audits

• 2. Policy Year Aggregation
• All exposures on policies with effective dates during the year
• Represented graphically by parallelograms

Total exposures arising from policies written during a specific time period

Portion of the written exposures for which coverage has been provided at a certain time

• Portion of written exposures for which coverage has not been provided
• Amount of exposure company has not yet earned

Number of insured units that are exposed to a claim as of agiven date

• 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

• Some lines of business use exposures which are affected by time-related influences
• E.g., payroll and sales revenue are affected by inflation
• May need to measure the exposure trend over time to project exposures at future levels

• Internal insurance company data (e.g., WC payroll data)
• Industry indices (e.g., average wage index)