Instructor: Klara Buysse

Casualty Actuarial Basic Ratemaking

Science
 Chapter 4: Exposures

I. Introduction

• Exposure =
❖ Basic unit that measures a policy’s exposure to loss
❖ Basic unit of risk underlying an insurance premium
• Example of an Exposure:
❖ Workers compensation insurance:
- Payroll is the exposure base
- Number of workers increases => payroll increases and thus the risk of
loss increases.
❖ Homeowners insurance:
- Number of years insured for a house is the exposure base.
- Expected loss for 1 house insured for 2 years is two times the
expected loss for 1 house insured for 1 year.
• Exposure is not:
❖ The true exposure, but a proxy:

• Collision exposure of a private passenger auto:

- zero when it is parked in a secure garage

- somewhat higher when driven in an isolated highway

- High on a crowded street with a drunk driver.

- Exposure base (car-years insured) only recognises the average

situation.
❖ Rating variable (although the dividing line can be arbitrary)

• Age is a rating variable:

- coverage for Driver A, who is twice as old as Driver B, does not

(usually) cost twice as much.
II. Exposure and Premium

How do we use Exposure in the Premium calculation:

Premium = # Exposures x Base Rate x (+) Rating Variables

• Premium does not vary only with the exposure base, but also with rating
variables.

• Underwriting guidelines:

• Not used in premium setting.

• Used for accepting the risks (e.g. only the better ones).
IV. Aggregation of Exposures

A. Methods of Aggregation for Annual Terms

Two methods applicable for exposures:

• Calendar year:

- Looks at a twelve-month calendar year

- Considers all exposures during the twelve-month calendar year.

• Policy year:

- Looks at a 24-month period

- Considers all exposures written during a twelve-month period.

 1. Calendar year aggregation
• Calendar year:

- Considers all exposures during the twelve-month calendar year.

- Graphically represented as squares (begin and end of the calendar year).

CY10 CY11 CY12

100%

A B C D E F
Term expired
% of Policy

50%

0%
1/1/10 1/1/11 1/1/12 1/1/13
 2. Policy year aggregation
• Policy year:

- Looks at a 24-month calendar year.

- Considers all exposures on policies with effective dates during the year.

- Graphically represented using a parallelogram.

PY10 PY11 PY12

100%

A B C D E F
Term expired
% of Policy

50%

0%
1/1/10 1/1/11 1/1/12 1/1/13
 6. In-force Exposures
• Definition:

In-force Exposure = the number of insured units that are exposed to having a
claim at a given point in time.

• Example:

- In force-exposure as of June 15, 2011: insured units that have an inception

date on or before that date, and an expiration date after this.

100%

A B C D E F
Term expired
% of Policy

50%

0%
1/1/10 1/1/11 6/15/11 1/1/12 1/1/13
 - Assuming “insured unit” refers to the number of houses exposed to loss.

In-Force Exposures a/o

Effective Expiration
Policy insured unit
Date Date 01/01/11 06/15/11 01/01/12
A 10/01/10 09/30/11 1.00 1.00 1.00 0.00
B 01/01/11 12/31/11 1.00 1.00 1.00 0.00
C 04/01/11 03/31/12 1.00 0.00 1.00 1.00
D 07/01/11 06/30/12 1.00 0.00 0.00 1.00
E 10/01/11 09/30/12 1.00 0.00 0.00 1.00
F 01/01/12 12/31/12 1.00 0.00 0.00 1.00
Total 6.00 2.00 3.00 4.00

100%

A B C D E F
Term expired
% of Policy

50%

0%
1/1/10 1/1/11 6/15/11 1/1/12 1/1/13
B. Policy Terms Other Than Annual
The previous sections was about annual policies.

• What about six-month policies?

❖ The exposure for a Homeowners insurance = 1 house insured for one year.
❖ For a six-month policies the exposure will be equal to 0.5
 • Example:
- Data from a six-month Homeowners insurance:

Policy Effective Date Expiration Date Exposure

A 10/01/10 03/31/11 0.50
B 01/01/11 06/30/11 0.50
C 04/01/11 09/30/11 0.50
D 07/01/11 12/31/11 0.50
E 10/01/11 03/31/12 0.50
F 01/01/12 06/30/12 0.50

- Geographically this can be presented as follows:

100%

A B C D E F
Term expired
% of Policy

50%

0%
1/1/10 1/1/11 1/1/12 1/1/13
• Calendar Year - Written Exposure:

Effective Expiration Written Exposures

Policy Exposure
Date Date CY 2010 CY 2011 CY 2012
A 10/01/10 03/31/11 0.50 0.50 0.00 0.00
B 01/01/11 06/30/11 0.50 0.00 0.50 0.00
C 04/01/11 09/30/11 0.50 0.00 0.50 0.00
D 07/01/11 12/31/11 0.50 0.00 0.50 0.00
E 10/01/11 03/31/12 0.50 0.00 0.50 0.00
F 01/01/12 06/30/12 0.50 0.00 0.00 0.50
Total 3.00 0.50 2.00 0.50

- Calendar Year aggregation:

Policy Written Exposure

CY 2010 0.50
CY 2011 2.00
CY 2012 0.50
• Calendar Year - Earned Exposure:

Effective Expiration Earned Exposures

Policy Exposure
Date Date CY 2010 CY 2011 CY 2012
A 10/01/10 03/31/11 0.50 0.25 0.25 0.00
B 01/01/11 06/30/11 0.50 0.00 0.50 0.00
C 04/01/11 09/30/11 0.50 0.00 0.50 0.00
D 07/01/11 12/31/11 0.50 0.00 0.50 0.00
E 10/01/11 03/31/12 0.50 0.00 0.25 0.25
F 01/01/12 06/30/12 0.50 0.00 0.00 0.50
Total 3.00 0.25 2.00 0.75

- Calendar Year aggregation:

Policy Earned Exposure

CY 2010 0.25
CY 2011 2.00
CY 2012 0.75
• Policy Year - Written Exposure:

Effective Expiration Written Exposures

Policy Exposure
Date Date PY 2010 PY 2011 PY 2012
A 10/01/10 03/31/11 0.50 0.50 0.00 0.00
B 01/01/11 06/30/11 0.50 0.00 0.50 0.00
C 04/01/11 09/30/11 0.50 0.00 0.50 0.00
D 07/01/11 12/31/11 0.50 0.00 0.50 0.00
E 10/01/11 03/31/12 0.50 0.00 0.50 0.00
F 01/01/12 06/30/12 0.50 0.00 0.00 0.50
Total 3.00 0.50 2.00 0.50

- Policy Year aggregation:

Policy Written Exposure

PY 2010 0.50
PY 2011 2.00
PY 2012 0.50
• Policy Year - Earned Exposure:

Effective Expiration Earned Exposures

Policy Exposure
Date Date PY 2010 PY 2011 PY 2012
A 10/01/10 03/31/11 0.50 0.50 0.00 0.00
B 01/01/11 06/30/11 0.50 0.00 0.50 0.00
C 04/01/11 09/30/11 0.50 0.00 0.50 0.00
D 07/01/11 12/31/11 0.50 0.00 0.50 0.00
E 10/01/11 03/31/12 0.50 0.00 0.50 0.00
F 01/01/12 06/30/12 0.50 0.00 0.00 0.50
Total 3.00 0.50 2.00 0.50

- Policy Year aggregation:

Policy Earned Exposure

PY 2010 0.50
PY 2011 2.00
PY 2012 0.50
• Insured units

Effective Expiration Number of In-Force Exposure a/o

Policy
Date Date Houses insured 01/01/11 06/15/11 01/01/12

A 10/01/10 03/31/11 1.00 1.00 0.00 0.00

B 01/01/11 06/30/11 1.00 1.00 1.00 0.00
C 04/01/11 09/30/11 1.00 0.00 1.00 0.00
D 07/01/11 12/31/11 1.00 0.00 0.00 0.00
E 10/01/11 03/31/12 1.00 0.00 0.00 1.00
F 01/01/12 06/30/12 1.00 0.00 0.00 1.00
Total 6.00 2.00 2.00 2.00

Dates In-Force Exposure

01/01/11 2.00
06/15/11 2.00
01/01/12 2.00
B. Calculation of Blocks of Exposures
Companies can have policy information:

• on individual basis (policy by policy)

• summarised on a monthly basis

How can we aggregate the summarised policy data:

• Treat all policies as if they are written on the mid-point of the period

• e.g. monthly basis: policies are assumed to be written on the 15th of the month

• => “15th of the month” rule or the “24ths” method

• Good approximation if policies are written uniformly during time period.

Example of In-force Exposures:

Company begins writing annual policies in 2010 and writes 240 exposures each month.

Assumed In-force Exposures a/o

Written
Exposure Effective
Month
Date 07/01/10 01/01/11 07/01/11
Jan-10 240 01/15/10 240 240 0
Feb-10 240 02/15/10 240 240 0
Mar-10 240 03/15/10 240 240 0
Apr-10 240 04/15/10 240 240 0
May-10 240 05/15/10 240 240 0
Jun-10 240 06/15/10 240 240 0
Jul-10 240 07/15/10 0 240 240
Aug-10 240 08/15/10 0 240 240
Sep-10 240 09/15/10 0 240 240
Oct-10 240 10/15/10 0 240 240
Nov-10 240 11/15/10 0 240 240
Dec-10 240 12/15/10 0 240 240
Total 2,880 1,440 2,880 1,440
Example of Earned Exposures:

- policies are written on the 15th of the month

- to calculate earned exposures we split the year by 24 periods (before the 15th and
after the 15th for each month)

- for annual policies the exposure is earned over a 13 month calendar period:

- 1/24 is earned on the second half of the month in which it was written

- 1/12 is earned in the following 12 months

- 1/24 is earned on the first half of the month 13.

 Assumed Earning Percentage Earned Exposures
Written Exposure
Effective
Month Written
Date 2010 2011 2010 2011
Jan-10 240 01/15/10 23/24 1/24 230 10
Feb-10 240 02/15/10 21/24 3/24 210 30
Mar-10 240 03/15/10 19/24 5/24 190 50
Apr-10 240 04/15/10 17/24 7/24 170 70
May-10 240 05/15/10 15/24 9/24 150 90
Jun-10 240 06/15/10 13/24 11/24 130 110
Jul-10 240 07/15/10 11/24 13/24 110 130
Aug-10 240 08/15/10 9/24 15/24 90 150
Sep-10 240 09/15/10 7/24 17/24 70 170
Oct-10 240 10/15/10 5/24 19/24 50 190
Nov-10 240 11/15/10 3/24 21/24 30 210
Dec-10 240 12/15/10 1/24 23/24 10 230
Total 2,880 1,440 1,440
 Exercise 1
We have the following information:

Personal Automobile Liability Data

Calendar Year 2016 Calendar Year 2017
Number of Autos Number of Autos
Effective Date Written on Effective Date Written on
Effective Date Effective Date
January 1, 2016 100 January 1, 2017 900
April 1, 2016 300 April 1, 2017 1,100
July 1, 2016 500 July 1, 2017 1,300
October 1, 2016 700 October 1, 2017 1,500

i) all policies are twelve-month policies

ii) Written premium per car during calendar year 2016 is $500.

a) Calculate the number of in-force exposures on January 1, 2017

b) Calculate the number of earned exposures for calendar year 2017

 Exercise 2
Given the following activity on five annual personal automobile policies as of June 30,
2009.

Original Midterm
Policy Effective Date
Expiration Date Cancellation Date

1 July 1, 2007 June 30, 2008 N/A

2 October 1, 2007 September 30, 2008 March 31, 2008

3 January 1, 2008 December 31, 2008 N/A

4 March 1, 2008 February 28, 2009 June 30, 2008

5 July 1, 2008 June 30, 2009 N/A

The exposure base is earned car years.

a) Calculate the 2008 calendar year written exposure.

b) Calculate the 2008 calendar year earned exposure.

c) Calculate the 2007 policy year written exposure

d) Calculate the in-force exposure as of April 1, 2008