Section 5 - Exposures (Chap 12)

Question 1

What’s an example of an uneven earning pattern?

Answer 1

Boat insurance! People buy policies before summer, so earnings aren’t spread evenly

Question 2

Why do we use average premium per exposure instead of total premium?

Answer 2

Because total premium can be misleading if the number of policies changes.

Question 3

3 criterias of a good exposure base

Answer 3

An exposure is the basic unit that measures a policy’s exposure to loss.
1) It should be directly proportional to expected loss
2) It should be practical
3) It should consider any pre-existing exposure base established within the industry (i.e.,
historical precedence)

Question 4

When do you apply exposure trend ?

Answer 4

In general, exposure trend applies
when exposures are inflation-sensitive (such as payroll). This means inflationary pressures impact exposures, which in turn impacts premium.

Question 5

Examples of Exposure Bases for
1. General liability
2. Property
3. Auto insurance

Answer 5

Payroll → Workers’ compensation, general liability

Receipts/Sales → General liability

Square Footage → Property insurance

Number of Vehicles → Auto insurance

Total Insured Value (TIV) → Property insurance

Question 7

Provide two circumstances in which exposure and premium trend adjustments need to be considered for a ratemaking analysis.

Answer 7

1) When working with inflation-sensitive exposures.
2) Where a change (or shift) in the mix of exposures and rating characteristics results in a corresponding change in premiums over time.