Experience rating vs exposure rating

[jack123]

Hi, I am confused on the distinction between experience rating and exposure rating.

The SP8 CMP defines experience rating as:

A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (usually in an earlier period, but sometimes in the period covered). The latter case is sometimes referred to as swing rated or loss sensitive, and there are often upper and lower limits defining a ‘collar’ or ‘corridor’.
Experience rating also has a more general meaning; for example, in the context of London Market rating. In this context, it is a rating based purely on the experience of the historical risk presented, as opposed to ‘exposure rating’.

While exposure rating is defined as:

A method of calculating the premium that is based on external data or benchmarks. The risk profile (exposure) of every insured from the product in question is examined. Scenarios of losses of various sizes are analysed and the impact on the policies is determined. The premium of each individual insured does not depend on the actual claims experience of that insured.
Instead, the amount of exposure that the insured brings to the insurer and the experience for comparable risks is used to calculate a premium rate.

If an insurer constructs a GLM of loss cost based on its past claims from multiple insureds, then uses that to price a new policy, is that experience rating or exposure rating? Based on the SP8 definitions, I would have thought that was exposure rating (because you are using claims information which is not from the insured). However I have heard some people call this experience rating because the insurer is using its own data.

Any clarification would be appreciated!

 

[Katherine Young]

Hi abc1,

The lesson here is that the meaning depends on the context.

The first quote you give makes reference to the importance of context, ie it talks about experience rating 'in the context of the London Market'. Your example isn't a London Market example (GLMs aren't extensively used in the London Market, at least not traditionally), so it doesn't make a great deal of sense to call this exposure rating as distinct from experience rating.

As ever, it is more important to understand the method being used than to pigeon-hole it under a specific name. The general insurance world is a complex beast and different practitioners may well use different names in different contexts, as you have noted.

 

[jack123]

Ok thanks