Understanding Exposures

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Quick Definition
Actuaries analyze trends based on historical loss and exposure information. Exposure data is a way to measure the type and scope of risk being analyzed. Exposures vary by line of coverage and you will discuss which exposure base is best for your analysis with your actuary. The most common measures of exposure are payroll for workers compensation, vehicles for automobile liability, and sales or revenue for general liability.

The Details
Your organization’s loss history is more valuable to the actuary when analyzed with risk or exposure data for the same time period. Unlike losses, which may show some degree of development (open claims may have reserve adjustments), exposure data remains the same after the policy year audit closes. Historical exposures should be gathered so they match the same time period for which historical losses are provided. However, if exposure data is not available for a given time period, actuaries can make estimates of the exposure based on an organization’s historical growth patterns.

One of the most important goals when collecting and compiling exposure data is to ensure it is consistent and matches the risk being evaluated. For example, if some years of historical payroll data contain bonuses or executive pay, then all years should contain bonuses or executive pay. If a risk management program has both a guaranteed cost and self-insured component, and the actuary is analyzing losses only for the self-insured portion of the program, then only payroll data related to the self-insured program should be included. Also, if the losses in a monopolistic state were excluded from the actuarial analyses, then the corresponding payroll in the monopolistic state should also be excluded. Be sure to align your exposure data with the loss data you are providing to the actuary.

Loss data typically comes from the loss runs provided by an insurance carrier or third party administrator. In contrast, exposure data often comes from several sources and this may create some challenges. For example, turnover in an organization’s accounting department might lead to a change in the way payroll numbers are recorded or totaled. However, in most cases, much of the exposure data has already been gathered and summarized for other purposes, like an underwriting submission or payroll tax returns. Be sure to consider all potential sources for the data in order to prevent duplicating work that has already been completed.

The collection of exposure data is an important step toward completing an actuarial report. The information gathered from that data may have a significant impact on the direction of the risk management program.

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