**This topic is covered in [[Exam 5 (CAS)]]** [[Actuarial Notes Wiki|Wiki]] / [[Actuarial Methods]] / [[Insurance Pricing]] / ==Exposure Base== > Exposure is when critical conditions and injurable objects exist in such relationship that accidents may result. The **Exposure Base** (or premium base) is ==the exposure medium selected as the basis for the charge of the premium.== > - Notes on Exposure and Premium Bases (Dorweiler - 1929) ## Examples of Exposure Bases | Line of Business | Typical Exposure Bases | | ---------------------------------- | -------------------------------------------------------- | | **Personal Automobile** | Earned Car Year | | **Homeowners** | Earned House Year | | **Workers Compensation** | Payroll | | **Commercial General Liability** | Sales Revenue, Payroll , Square Footage, Number of Units | | **Commercial Business Property** | Amount of Insurance Coverage | | **Physician's Professional Liability** | Number of Physician Years | | **Professional Liability** | Number of Professionals (e.g., Lawyers or Accountants) | | **Personal Articles Floater** | Value of Item | Source: [[Exam 5 - Basic Ratemaking - Werner and Modlin.pdf]] ## Criteria for Exposure Bases The following criteria can be used to evaluate exposure bases. | Criteria | Description | | --------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Proportional to Expected Loss** | The expected loss of a policy with *two exposures* is twice the expected loss of an identical policy with *one exposure*.<br><br>Reason: Responsive to changes in risk exposure. | | **Practical** | The information is objective, verifiable, and inexpensive.<br><br>Reason: Consistent measurement and mitigates [[Moral Hazard]]. | | **Historical Precedence** | The exposure base is currently used or has been used in the past.<br><br>Reason: Changing the exposure base can cause premium swings and require data adjustments. | Source: [[Exam 5 - Basic Ratemaking - Werner and Modlin.pdf]] Additionally, the CAS Statement of Principles provides the following guidance for selecting exposure bases: > "Exposure Unit - The determination of an appropriate exposure unit or premium basis is essential. It is desirable that the exposure unit vary with the hazard and be practical and verifiable." > - [Statement of Principles Regarding Property and Casualty Insurance Ratemaking (PDF)](https://www.casact.org/sites/default/files/2021-05/Statement-Of-Principles-Ratemaking.pdf) (CAS - 1988) ## Further reading 1. [Exposure Bases Revisted (PDF)](https://www.casact.org/sites/default/files/2021-02/pubs_proceed_proceed89_89001.pdf) (Bouska - 1989)