An example from credit cards industry will be : exposure measure is credit line given on the card. A rating factor could be number of trades he was delinquent on in last one year. From general insurance , example could be size of the car engine, or simply mileage per year. Rating factor will be driving condition- whether driven in metros or small cities, or may be age of driving license
Difference between the two is the way these are used: exposure measure will be used in giving a rate for total premium. Hence it is important that it is correlated with the risk of claim/claims cost. Rating factor is used in classifying the total risk into homogeneous subgroups, so that premium appropriate to the relative level of risk is charged.
You may also wish to look at the Glossary definitions for the two terms: Exposure Measure - Basic unit used by insurer to measure the amount of risk insured over a given period. Rating Factor - Factor used to determine the premium rate for a policy. An exposure measure is usually proportional to the risk. It will almost always be a rating factor itself. Rating factors are risk factors or proxies for risk factors. Examples from Motor Insurance: Exposure Measure - Vehicle-Years Risk Factor - How good a driver you are Rating Factor - Number of years of NCD.
I'm aware that this thread is quite old, but to save starting a new one, what is a "Vehicle-year"? Am I right in thinking that: The exposure measure is how exposed the insurer is to losses, that is, if they look at all the cars that the they insure over the year, and A risk factor just looks at a individual policy and the risk of how much they expect claim? Cheers Pete
This is the number of cars that are insured by the policy, in a year. So for example, if a policy covers one car for a whole year, the vehicle-year is 1. If the policy covers one car but it's only a 6 month policy (pretty unusual, but let's run with it), the vehicle-year is 0.5. If the policy covers 2 cars and it's a 3 year policy (again, pretty weird), the vehicle-year is 6. Normally of course, for personal motor, you have one car covered for one year. The exposure measure tells is how exposed you are to losses. In ST8, when they ask you about an exposure measure, they're really asking about what the exposure measure is for a single policy. If you're looking at a whole portfolio the exposure measure could be the total vehicle-years for the book, but in practice we often talk about the total written premium say (again because that is a measure of how much risk you're exposed to). A risk factor is anything that affects the riskiness of a policy. There are many of these for motor insurance, eg mileage, type of car, age of driver, speed driven, postcode, where the vehicle is kept overnight, ability of driver etc.
I am aware that vehicle-years is a commonly used exposure measure for personal motor lines. However, I read in the ST8 text that an exposure measure should be proportional to the expected claims cost. This isn't true with vehicle-years of course - a luxury/SUV car has a higher expected claims cost than a hatchback, but vehicle-years = 1 for both of these. Am I missing something here? Or is vehicle-years simply the only valid measure suitable for all classes of motor business? What would happen if premiums were used as an exposure measure in such a case?
I am also a bit confused. You raised a good question. The tutor Katherine mentions that the exposure measure relates to a single policy. Based on your example (an expensive car versus a cheaper one), I would suppose that vehicle -years is not an appropriate exposure measure. On the other hand, vehicle-years could be okay on a whole car portfolio level.
Vehicle-years is ok as an exposure measure. It measures the risk on a policy or a group of policies. But it's only meant to be an approximate measure of risk, and yes, it doesn't take into account differences in cars, so in that respect it's not perfect, but it's probably suitable for most purposes. Premiums could be an exposure measure too - but not very useful if you're trying to use the exposure measure for premium rating purposes!
