[[Actuarial Notes Wiki|Wiki]] / [[Concepts]] / **Exposure Base** Exams: [[Exam 5 (CAS)#^exposure-base]] ## Definition An ==Exposure Base== is a unit of measurement used in insurance ratemaking that represents the amount of risk or potential for loss. It serves as the denominator in rate calculations and should be proportional to expected losses. ## Key Characteristics ### Ideal Properties A good exposure base should: 1. **Be proportional to expected losses** - More exposure should correlate with higher expected losses 2. **Be practical to implement** - Easy to measure and verify 3. **Be objective** - Not easily manipulated by the insured 4. **Be known at policy inception** - Determinable when the policy is issued 5. **Support rate equity** - Allow for fair differentiation among risks ### Common Exposure Bases by Line of Business **Personal Auto** - Car-years (number of insured vehicles) - Driver-years (number of insured drivers) **Commercial Auto** - Vehicle-years - Miles driven - Gross receipts (for trucking) **Workers Compensation** - Payroll ($100 of payroll) - Employee-hours **General Liability** - Sales (for products liability) - Square footage (for premises liability) - Payroll (for operations) **Property Insurance** - $1,000 of insured value - Building units **Medical Malpractice** - Physician-years - Procedures performed ## Evaluation Criteria When selecting an exposure base, actuaries consider: **Relationship to Loss** - The exposure should have a strong correlation with claim frequency and/or severity - Historical data analysis can validate this relationship **Practical Considerations** - Availability and reliability of data - Cost of collection and verification - Ease of understanding for insureds - Industry standards and competitive practices **Regulatory Requirements** - Some jurisdictions mandate specific exposure bases - Must comply with rate filing requirements ## Example Calculation For workers compensation with payroll as the exposure base: ``` Manual Rate = ($100 of payroll) Expected Loss per Exposure = $2.50 per $100 of payroll If Insured has $500,000 annual payroll: Exposures = $500,000 / $100 = 5,000 exposure units Expected Premium = 5,000 × $2.50 = $12,500 ``` ## Special Considerations **Changing Exposure Bases** - Transitioning to a new exposure base requires careful analysis - Historical data must be converted to the new base - Rate indications must be recalculated **Composite vs. Specific Exposure** - Some coverages use composite rates (single rate for all exposures) - Others use class-specific rates tied to detailed exposure measures ## Related Concepts - [[Pure Premium Method]] - [[Loss Ratio Method]] - [[Classification Ratemaking]] - [[Rate Equity]] - [[Homogeneity]] ## References - Werner & Modlin, Chapter 1 - ASOP 12 (Risk Classification)