Question

Premium Auditing

Identify aspects of exposure bases used to develop premiums.

A. How can exposure bases be sensitive to inflation?

B. What makes an exposure base easy to determine?

C. Why are some exposure bases difficult to manipulate?

Answer 1

Answer to Part A

Inflation is one of the factor affecting the Exposure Base. Exposure base is the basis to which the rate is applied to determine the amount of premium for the particular cover. The exposure is directly proportional to the Inflation rate prevailing the economy. That means, the inflation contributes to the quantum of hazard covered by the insurance policy.

Answer to Part B

Determination of Exposure base is critical in Insurance business and if it is not accurate it would lead to false confidence, mispricing and adverse selection. As the factors influencing exposure base include the Demography, the type of insurance, Economic conditions etc., the determination of the same is very difficult. That is why the insurance business collects and verify all the data related to the same and obtains the confirmation or verification from the outside experts as well. Understanding the factors influencing the Particular policy exposure base and verification of the impact and genuineness of the same would enable the determination of the exposure base easier in a broad sense.

Answer to Part C

Exposure base are sometimes very difficult to manipulate due to many reasons. The availability of the accurate data in a public domain, Inherent resistance to the manipulation etc. are some of the factors that makes the bases difficult to manipulate. For example, if the accurate data related a policy is available and accessible in public domain, the exposure base can be determined easily and accurately and the manipulation of the same shall be difficult to the maximum extend.