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Exposure rating

Pricing based on risk exposure and reference curves rather than on a risk's own history, useful for high layers and risks lacking sufficient track record.

Definition

Exposure rating estimates the cost of a risk without going through its own claims history, as burning cost does. It starts from a measure of the risk's exposure and from reference curves describing how losses are distributed by size. It is used where the track record is too thin to be reliable: the risk is new, or the layer is a high one that is rarely hit, and direct experience is too sparse. Exposure curves say what share of the exposed value is likely to be reached above various thresholds, so the actuary can estimate a layer's premium even with no losses observed at that level. It complements burning cost: one looks at the risk's own past, the other at broader knowledge of how losses are distributed, and the two are often combined to cross-check. In cyber reinsurance, the track record on extreme events is very thin and burning cost is unreliable, so exposure rating, fed by scenario models, carries all the more weight.

Its 9 cross-references, woven across the glossary's 18 categories
Exposure rating: Actuarial science glossary illustration, AlgoPolis
Example

Hypothetical case: to price a high layer that has never been hit, the actuary cannot rely on history. They turn to exposure rating, using reference curves and modeled scenarios to estimate the probability that losses reach that level.

Read next
Actuarial scienceCatastrophe model (cat model)A probabilistic simulation tool that estimates potential losses of rare catastrophic events from simulated scenarios, combining a hazard module, an exposure module, a vulnerability module and a financial module.Read the entry →Actuarial scienceFrequency and severityThe decomposition of risk into the number of losses and the average cost per loss, the foundation of pure premium pricing.Read the entry →Actuarial scienceExposure curveFunction giving the share of the original premium that goes to a deductible or a layer, based on the size of that layer relative to the insured value. You can price with no loss history at all.Read the entry →
Related terms
Go further at the Academy
Also known as

exposure rating, exposure curve rating, ILF rating

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