Exposure-based methods

[DanielZ]

In chapter 13, page 20, the course notes describe exposure-based methods for reserving. Both bottom-up and top-down approaches seem to apply to a loss event that has already occurred, which puzzled me a little, as I thought that exposure-based methods could also apply before a loss event has occurred.

The expected loss ratio method is also an exposure-based method, right?
I wondered why the section on page 20 was not included in the expected loss ratio section, but I guess the answer is that the bottom-up and top-down approaches are specifically for dealing with large / catastrophe losses.

In the Apr 2012 exam, Q6 (iv), the question asks about exposure-based methods, but the expected loss ratio method is not mentioned in the solution

Dan

 

[Darren Michaels]

Exposure-based methods are more commonly applied to a loss event that has already happened as described in the notes.

In order to apply them you need either a market estimate of the loss (top down approach) or an understanding of which policies will be impacted by the loss (bottom up approach).

You could in theory apply them to a loss event that hasn't happened yet, but you would need to have a good understanding of what that loss event was to be able to apply them, which makes it less likely.

In some senses the expected loss ratio method could be regarded as an exposure based method since it is about applying a loss ratio to a measure of exposure, but I think it is more common to think of it as a statistical or claims based method.