Exposure rating

Category: Reinsurance pricing · Reviewed by Tim Roche, Director · PI & Commercial · Last reviewed

Exposure rating

Exposure rating is a reinsurance pricing technique that estimates the loss cost to a layer from the shape of the exposure rather than from the cedent’s loss history. It is essential for higher layers where historical losses are too sparse to be credibly used.

Method

1. Characterise the exposure — schedule of insured locations / risks with sums insured, occupancy, construction, geography.
2. Identify or estimate the size-of-loss curve — the proportion of ground-up loss expected to fall in any layer, by occupancy and TIV band. Standard industry curves include Lloyd’s curves, Ludwig curves, MBBEFD (Bernegger), Salzmann, Riebesell.
3. Apply curves to each exposure band — compute the expected loss cost to the layer for each band.
4. Sum across bands — total expected loss to the layer.
5. Load for risk margin, brokerage, capital, profit.

Curves

• Lloyd’s curves — historical curve set used in Lloyd’s facultative property pricing.
• Bernegger MBBEFD — modified Bernegger, Burnecki, Esscher, Furrer, Drepper curve family commonly used by reinsurers.
• Salzmann tables — earlier 1960s US tables for fire risks.
• Industry occupancy curves — provided by Swiss Re and other reinsurers.

Combining with experience

For mid-layers, exposure rating and burning cost are commonly credibility-weighted:

Indicated price = Z × (Burning cost rate) + (1 − Z) × (Exposure rate)

with Z increasing in the credibility of the experience.

References

• Bernegger, S. (1997). The Swiss Re Exposure Curves and the MBBEFD Distribution Class. ASTIN Bulletin 27.
• Swiss Re. Exposure rating in property reinsurance.
• IFoA. Practical Guide to Reinsurance.

Cross-references

• Burning cost reinsurance
• Excess of loss pricing
• Catastrophe model

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.