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.
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
Is exposure the same as the maximum benefit my policy can pay out?
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 policy holders are given preference over shareholders when it comes to distributing remaining assets and funds.