Exposure

The exposure of an insurance company is the total liability they would have to cover in the event of the maximum possible claim being made and accepted under any particular policy.

How is exposure calculated?

Exposure is normally calculated by insurance companies in exposure units, these can be defined in many different units.

For example:

Payroll Units – this could be in the case of employer’s liability insurance or workers’ compensation

Receipts – in terms of coverage for a retailer or storekeeper

Sales – in terms of coverage for loss of current and/or future earnings for businesses

Square-footage or simply area – This would be applied for buildings or property insurance in some instances

Man-Hours – for more general liability insurance

Per Unit – for manufacturing insurance where the per-unit production figure is a key part of the manufacturing process

Or most commonly of all per $1,000 of value covered by the policy

The exposure determines insurance premiums. It specifies the amount of risk in a company’s line of business. The type of exposure unit used depends on the type of insurance and business. For example, payroll units are used when workers’ compensation or employer’s liability insurance is involved.

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Is exposure the same as the maximum benefit my policy can payout?

Not really, most insurers don’t assume the entire risk of a policy on their own. In fact, it is common practice to have some of the risk underwritten by another insurer or insurers. In these instances, your insurer does not have the same level of exposure as they would have if they had assumed all the risk themselves.

In practice, some specialist insurers may choose to assume all the risk of a given policy particularly in those cases where their exposure is limited and risks are perceived to be negligible in terms of a maximum benefit claim, but this is an exception to the rule. In these instances however your insurer’s exposure would be exactly the same as the maximum benefit payable under the terms of your policy.

In practice what does an insurer’s exposure have to do with me?

Most of the time an insurer’s exposure will be kept within strict limits and in terms of ordinary operations, an insurer will have enough assets and additional insurance to offset the costs of paying benefits under individual policies.

However, an insurer can become over-exposed if risk management procedures aren’t properly adhered to and in these instances, it may be that a rush of claims can lead to insolvency for the insurer.

In the case of insolvency, policyholders are given preference over shareholders when it comes to distributing remaining assets and funds.

Additional Exposure (Insurance) Definition

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