Exposure
Measure of the activity or area exposed to risk, the basis for calculating frequency and pure premium.
A motor portfolio grows from 8,000 to 12,000 vehicle-years between 2022 and 2023, and its claim count rises: without relating that count to volume, you learn nothing about the quality of the risk. Exposure measures the quantity of risk carried over a period. It is chosen to be proportional to risk and consistent with the claim count. Common units are the policy-year (one policy in force for one year counts as one unit), the vehicle-year in motor, the sum insured in fire, headcount in workers' compensation, revenue in professional liability, the passenger-kilometer in transport. Frequency and pure premium are calculated per exposure unit, which makes portfolios of different sizes comparable. A poorly chosen unit introduces a systematic pricing bias.
A motor portfolio grows from 8,000 to 12,000 vehicle-years between 2022 and 2023. Frequency falls from 12.0% to 11.5%: improved performance despite a higher absolute claim count.
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