A.3 Policy Data

Question 1

Definition of an exposure and an exposure base

Answer 1

An exposure is the basic unit of risk underlying the insurance premium.

The definition of what an exposure represents varies by line of business and sometimes coverage and is called an exposure base.

Question 2

3 criteria for a good exposure base

Answer 2

1. Proportional to expected loss: The exposure base chosen for a line of business should be the risk characteristic that exhibits the most directly proportional relationship to losses.
2. Practical: The exposure base should be objective, and easy & inexpensive to obtain and verify.
3. Considerate of historical precedence: It is very costly for the industry to change an existing exposure base because:
   -It can result in large premium swings for individual
   insureds.
   -It requires changing the rating algorithm, which can be costly from an IT standpoint.
   -It will require significant adjustments for future
   ratemaking analyses.

Question 3

Definitions of written, earned, unearned, in-force

Answer 3

1. Written Exposures/Premium: The total
   exposures/premium coming from policies issued during a given time period as of a certain point in time.
2. Earned Exposures/Premium: The portion of written exposures/premium for which coverage has been provided as of a certain point in time. The insurer keeps this if the policy is canceled.
3. Unearned Exposures/Premium: The portion of written exposures/premium for which coverage has NOT been provided as of a certain point in time.
4. In-force Exposures/Premium: The number of insured units/the amount of full-term premium, for all policies exposed to loss at a given point in time.

Question 4

2 ways to aggregate exposure metrics over time

Answer 4

• Calendar year: This considers all policies during the year regardless of policy effective dates. Calendar year metrics are fixed once the year is over.
• Policy year: This considers all policies with policy effective dates during the year. Policy year metrics can still change after the year is over.

Question 5

Diagram of % earned for a 6-month auto policy
effective 10/1/2014 by calendar year

Answer 5

Question 6

Diagram of % earned for a 6-month auto policy
effective 10/1/2014 by policy year

Answer 6

Question 7

Formula Relation between written, earned, and
unearned

Answer 7

CY Written = CY Earned + CY Change in Unearned

PY Written = PY Earned + PY Unearned