Could someone please help me understand why premium can be used as an exposure measure? If premium is based off of how exposed to something you are, then having exposure based off of premium is circular isn't it?
Thanks both for replying. Pede, I did see that post on exposure measures but didn't think that it clarified it fully for me. Is it OK to think of premium as an exposure measure when not for rating purposes? So Uros your example regarding RI, the reinsurer could use the premium that the direct writer charged the customer as a rating factor when calculating the RI premium to charge. It's clearer now, thanks.
I think you're all on the right track here. Premium is often used as an approximate measure of exposure - for example, it's reasonable to say that a company that has huge premium income has huge exposure (ie has lots of policies in force). But it's only approximate. For example, another company may charge less for exactly the same portfolio, so the exposure is unchanged by the premium is lower. To use premium as an exposure measure when you're pricing may not make much sense, as you say, since it's a circular argument. However, there are some instances when exposure has a big influence on pricing - for example, when you use exposure rating methods such as ILFs and exposure curves - covered in Chapter 15.
