Exposure Curves

Question 1

some basics about exposure curves

Answer 1

1. exposure curve is discrete or continuous distribution representing expected limited loss at various limits divided by expected unlimited loss
2. value of exposure curve at given limit is equal to 1-excess ratio for that limit
3. exposure curves are built on data outside of risk we are trying to rate’s own experience
4. exposure curves are critical in pricing non-proportional reinsurance and can be used in combo with experience rating to address issue of free cover
5. typically separate exposure curves are generated for different risk sizes and all risks of given size are assumed to be homogeneous so same curve applies to all risks of given size
6. when using exposure curves, you should make sure that data behind curves is at same granularity as what you are pricing

Question 2

• Bernegger says problem in exposure rating is how to divide total premiums of each risk size group between ceding company and reinsurer
• solved in 2 steps:

Answer 2

1. estimate overall risk premium (aka expected loss) for each risk size group by applying expected loss ratio to gross premiums
2. divide risk premiums into retained and ceded portions with help of loss distribution functions