W&M Ch 4

Question 1

What criteria should a good exposure base meet?

Answer 1

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

Question 2

Define “Exposure”

Answer 2

Basic unit that measures a policy’s exposure to loss

Question 3

Describe criteria for Exposure Bases: Practical

Answer 3

Selected base should be well-defined, objective, and relatively easy and inexpensive to obtain and verify
-will be consistently measured

Question 4

Describe criteria for Exposure Bases: Proportional to Expected Loss

Answer 4

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

Question 5

Describe criteria for Exposure Bases: Historical Precedence

Answer 5

Should carefully consider changes in an exposure base prior to implementing

• can lead to large premium swings
• requires a change in rating algorithm

Question 6

Exposures for Large Commercial Risks

Answer 6

• Composite rating

- Loss-related composite rating

Question 7

What are the two methods of Aggregation of Exposures?

Answer 7

1. Calendar Year aggregation and accident year aggregation
   - All exposures on policies within calendar period
   - -regardless of policy effective date
   - -represented graphically by squares
2. Policy Year aggregation
   - All exposures on policies with effective dates during the year
   - -represented graphically by parallelograms

Question 8

What are Written Exposures?

Answer 8

Total exposures arising from policies written during a specific time period

Question 9

What are Earned Exposures?

Answer 9

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

Question 10

What are Unearned Exposures?

Answer 10

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

Question 11

What are Inforce Exposures?

Answer 11

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

Question 12

Describe Exposure Trend

Answer 12

• 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

Question 13

Selected trends for Exposure Trend can use:

Answer 13

• Internal insurance company data (e.g. WC payroll data)

- Industry indices (e.g. average wage index)