What Is Exposure Rating?

Exposure rating is a procedure used to calculate risk exposure in a 澳洲幸运5官方开奖结果体彩网:reinsurance treaty. The loss experience of a 澳洲幸运5官方开奖结果体彩网:portfolio of similar, but not identical, risks is examined in order to determine the potential losses of a client. This process is usually initiated if the 澳洲幸运5官方开奖结果体彩网:reinsurer does not have sufficient credible claims history from the insured party in question.

Exposure rating is one of two risk calculations used in the insurance industry — the other being the 澳洲幸运5官方开奖结果体彩网:experience rating method.

Understanding Exposure Rating

Treaty reinsurance is insurance purchased by one insurance company from another. A contract is drawn up between the 澳洲幸运5官方开奖结果体彩网:ceding insurance company and the reinsurer, who agrees to accept the risks of a predetermined class of pol♈icies over a period of time.

When developing the reinsurance treaty price, the reinsurer must estimate the likelihood that a loss will exceed the damage amount retained by the ceding company. Sometimes, reinsurers may execute an 澳洲幸运5官方开奖结果体彩网:excess of loss reinsurance treaty, in which the reinsurer agrees to pay for losses above the specific amount retained by the cedent🥃. Excess of loss treaties may alsoꦜ cap the damages for which the reinsurer is responsible.

In any case, both reinsurance treaties require the reinsurer to estimate the frequency and severity of claims, creating a general 澳洲幸运5官方开奖结果体彩网:risk profile thaꦑt they may reference when setting the treaty price.

Using either exposure rating or experience rating, a reinsurer will d🍰etermine their risk-to-reward horizon. Reinsurers often use exposure rating when the company does not have enough historical data to develop an experience rating. Exposure is also useful when the probability that a specific loss will occur is considered🌳 low.

Exposure Rating Method

Aꦰn exposure rating is generated by examining the loss experience of a portfolio of similar, but not identical, risks. The assumption is that risks in similar risk groups will display similar loss experiences. 

The res🅺ult of an exposure rating is an estimation of the expected losses the company could expect to experience for𓃲 a specific event. The method expresses loss as a percentage of the amount of value insured.

The data will generate an exposure curve. As you move along the curve, the cumulative loss, as a percent of insured value, approaches 100 percent. Exposure rating allows the reinsurer to examine loss severity in layers, and will ultimately allow the reinsurer to set prices fo🐷r risks that are estimated to fall within each of the various layers.

Exposure Rating vs. Experience Rating

Exposure ratings differ from experience ratings in that they do not require ꦺthe reinsurer to have had dir♕ect historical experience with the specific risk.

With experience rating, a reinsurer will examine historical loss data their company has experienced iꦯn association with a specific risk event. For instance, the reinsurer may look at the value of claims they covered for earthquakes in a particular region. The reinsurer will use their historic experience and will adjust histor𒁏ical loss data to estimate future losses to the same specific risk. 

Limitations of Exposure Rating

One disadvantage of the exposure rating meꦅthod is that it creates a zone in each layer in which the losses approach, but do not reach, the next level of retention. Reinsurers may use a distribution table toꦛ set the rate for the lower bounds of the layer.

An additional drawback is that the reinsurer must assign a high degree of credibility to data sources that are not its own. It must dꦇepend on the data derived from other insurers and third-party rating systems to s꧃et its risk exposure. For this reason, the experience rating method may be the preferred approach.