MATH3806 – Topics in General Insurance

620106600
620108498
620101387
620107804
620077281
1. Criteria for a good measure of exposure

➢ Directly proportional to expected loss

• Should be directly proportional to risk, hence 2 exposures should be twice expected risk.

• Not necessarily the only basis by which losses will be determined.

• Example: Motor vehicle insurance, A vehicle worth $2M should have twice as much

exposure as a vehicle worth $1M.

➢ Practicality

• Should be relatively easy and inexpensive to obtain and verify.

• Basis should have little opportunity to be manipulated in favor of the policyholder.

• Most directly related exposure basis is not necessarily the most practical

• Example: Motor vehicle insurance, an exposure basis may be mileage or car age,

however both measures are manipulatable by the policy holder, either by manually

adjusting the meter (mileage) or pure dishonesty (car age). Verifying either would be

virtually impossible and impractical for the company.

➢ Historical Precedence

• Older bases are preferred as information on rating these are more easily attainable.

• Introduction to new bases may lead to massive changes in premium which may be

unfavorable to policyholders and lead to loss of business.

• Changing the rating system would require significant effort and time, which may prove to

be unprofitable in the long run.

• Analysis is usually based on historical data, with a new bases, historical data will be

lacking.
#2

Line of Business Exposure Measure

Workers Compensation Payroll
Commercial Business Property Amount of Insurance Coverage
Professional Liability Number of Professionals
Personal Automobile Earned Car Year
Homeowners Earned House Year
Personal Articles Floater Value of Item
Q3: WRITE DOWN THE FOUR (4) METHODS USED FOR AGGREGATING EXPOSURE AND
GIVE THE ADVANTAGES AND DISADVANTAGES FOR EACH.

● There are four (4) main methods of data aggregation used in ratemaking analysis, which
include calendar year, accident year, policy year, and report year. However, for exposure
aggregation only two are applicable; Calendar-Accident Year and Policy Year. Which is
further broken down by four (4) ways; written exposure, earned exposure, unearned
exposure, and in-forced exposure.

Written Exposures
Consider all exposures during the twelve-month calendar year without regard to the date of
policy issuance.
1. Calendar Year Aggregation
Advantages:
● At the end of the calendar year, all written exposures are fixed.\
● Easier to sum up and close.

Disadvantages:
● If a policy cancels midterm, the policy will contribute written exposure to two different
calendar years if the date of the cancellation is in a different calendar year than the
original effective date

2. Policy Year Aggregation

Advantages:
Since policy year written exposure is aggregated by policy effective dates, the originally written
exposure, and the written exposure due to the cancellation are all booked in the same policy
year.

Disadvantages:
The policy year takes significantly longer to close.
Earned Exposure
This​ ​represents the portion of the written exposures for which coverage has already been
provided as of a certain point in time
3. Calendar Year Aggregation
Advantages:
● Shows the distribution of earned exposure to each calendar year:

Disadvantages:
● All earned exposure is assigned to the year the policy was written and increases in
relation to time.

4. Policy Year Aggregation

Advantages:
● Unlike calendar year earned exposure, exposure for one policy cannot be earned in two
different policy years.

Unearned Exposures
This represents the portion of the written exposures for which coverage has not yet been
provided as of that point in time.
● For groups of policies, Policy year aggregation as of a certain point in time would follow
the formula immediately above.
Written Exposures = Earned Exposures + Unearned Exposures.

● On the other hand, Calendar year aggregation need to consider the unearned exposures
at the beginning of the calendar year and at the end of the calendar year as follows:
CY Unearned Exposures = CY Written Exposures – CY Earned Exposures + Unearned
Exposures as of the beginning of CY.

In-force exposures
These are the number of insured units that are exposed to having a claim at a given point in
time.
● They represent the exposure to lose as a snapshot in time with no consideration for the
duration of the exposure.
● Not all insurance companies define “insured units” the same way. Most companies
define insured units to be the count of items exposed to loss at a given point in time.
● A vertical line drawn at the valuation date will intersect the policies that are in force on
that date. Each policy contributes to the in-force exposures as of that date.
#5. WRITE SHORT NOTES ON EXPOSURE TREND.

Exposure Trend

Rate changes are not the only thing that can change the average premium level. The fundamental

insurance equation requires premiums be equals to outgo and targeted profit. For some lines of

business, it is prudent to measure the exposure trend through internal data. In fact, the average

premium level can change over time due to inflation in lines of business with exposure bases.

With this mind, it may be prudent to measure the trend in historical exposures over time in order

to project exposure levels in the future. These trends can be measured via internal insurance

company data or via industry indices. The way in which exposure trend impacts the calculation

of the overall rate level indication depends on several factors such as whether the loss ratio or

pure premium method is employed and how loss trends are calculated.