Werner & Modlin 4

Front 1

Good Exposure Base (1 of 3)

Back 1

Proportional to expected loss: factor with most direct relationship to expected loss s/b selected as exposure base. Also makes exposure base more easily understood. If expo base is proportional to expected loss, s/b responsive to changes in exposure to risk

Front 2

Good Exposure Base (2 of 3)

Back 2

Practical: selected base s/b well-defined, objective and relatively easy and inexpensive to obtain and verify. This precludes p/h, producers and u/w from manipulating expo info. e.g., personal auto (car years vs. miles driven); products liab (gross sales vs. # of products currently in use)

Front 3

Good Exposure Base (3 of 3)

Back 3

Historical precedence: should carefully consider change in expo base prior to implementing
- can lead to large prem swings
- requires chg in rating algorithm (may req significant chgs to rating systems and manuals)
- may necessitate significant data adjustments for future ratemaking analyses

e.g., WC considered changing from payroll to hours worked for med cov. Made intuitive sense but concerns with implementation, so used rating variables instead

Front 4

Exposures for large comm'l risks

Back 4

1. composite rating: calc prem normally and divide by proxy (e.g., mileage or receipts)
2. loss-rated composite rating: prem calc'd directly from historical losses. Implicit expo base is risk itself w/ rate = expected losses. Charged prem = expected losses + expense load