What Does Exposure Mean?
If you have not noticed already, a lot of words in the insurance world mean something totally different than what one might see in daily life. The term “exposure” is no different.
In insurance terms, exposure refers to an individual, business, or entity’s susceptibility to various losses or risks they might encounter in life or in the ordinary course of business.
Basically, it refers to their potential for accidents or other types of losses like crime, fire, earthquake, etc. The greater your exposure to potential losses, the higher you can expect your premiums to be as the insurer needs to charge more to profitably insure you.
From the insurer’s perspective, these insured entities may be referred to as exposures as well. This is because each policy they write or person they insure represents the potential for a claim, meaning a risk to the insurer of having to pay out if they file a claim.
Insurance companies usually look at four different types of exposures in their policies. These include:
Exposure: The basic unit that underlies an insurance premium.
Earned Exposure: The exposure units actually exposed to loss in a given period.
In-Force Exposure: The exposure units actually exposed to loss at a given point in time.
Written Exposure: The units of exposure on policies written during a given period.
Insuranceopedia Explains Exposure
An individual, business, or other entity’s exposure is a key piece of information that insurers will evaluate in order to figure out the level of risk they face and premium they must charge in order to profitably write the business.
For example, someone with more property or a business that conducts high-risk activities in the ordinary course of business would expect to have a higher loss exposure and therefore pay more for insurance than others.
One way to illustrate this concept is with an example. Imagine two companies in the manufacturing industry. They are both the same size, work in a similar factory, have the same number of employees, and have the same amount of revenue. But Company A manufactures pencils while the other, Company B, manufactures pharmaceutical products.
Even though the two businesses are exactly the same in almost every way, Company B has a much higher potential for loss (loss exposure) for things like liability claims because of the products they manufacture. This means that Company B will likely pay more for insurance than Company A since they are at a higher risk of loss, or exposure.
The same can be said of individuals. Using car insurance as an example, the more kilometers you drive on a regular basis, the more exposure to losses you have. Every second you are on the road increases your likelihood of being in an accident—even one that you are not at fault for.
That means that the more you drive, the more you are likely to pay for automobile insurance. This is why delivery vehicles or vehicles used for business purposes likely pay more for insurance than one that is simply for pleasure use.