Exposure

What is exposure in insurance?

In insurance, exposure is a measure of the potential risk faced by an insurance company as a result of their normal business operations—namely, selling insurance policies.

When an insurer sells a policy, they must cover insured losses that fall within the terms and conditions of coverage. They sometimes call that requirement their exposure. As they sell more policies, their exposure grows.

Exposure is the potential for having to pay out claims. A policy sold to a customer who never ends up making a claim is still an exposure, because the insurer could need to pay a claim.

There are multiple ways an insurer may look at their exposure:

• In-force exposure. This refers to how much total exposure the insurer has at a singular point in time. For example: if an insurance company’s portfolio has active policies totalling $50 million in coverage on January 1, they might say they have $50 million in in-force exposure.
• Written exposure. This is the total new coverage sold by the insurer over a period of time. For example: if they sold policies totalling $100 million in coverage during January, that would be their written exposure for the month.
• Earned exposure. When an insurer writes a new policy, that policy isn’t necessarily active right away; you could buy a policy in January for coverage to start the following month. When a policy is actually active, the exposure is earned as time passes. So earned exposure is a measure of how much coverage was actually in place over a period of time, rather than what was sold.

It’s worth noting that, as an insurance customer, you probably won’t run into the term “exposure” too often—it’s pretty much industry jargon.

In fact, you may relate more to the other side of the coin: the price insurers charge in exchange for taking on exposure. Insurance premiums are tied very closely to exposure.

How is exposure determined?

In home insurance, one aspect of exposure is the insured value on each policy: the replacement value of the house and contents, the liability coverage limits, and so on.

But, another aspect of exposure is the risk faced by a home; homes with higher chances of suffering a loss are, accordingly, larger exposures.

So, the insurance company has the same exposure for both homes, right?

From the money perspective, sure. If both homes are destroyed in an insured loss, the insurer would have to pay the same $200,000 cost to rebuild them.

But, the home in Vancouver is exposed to different risks than the one in Calgary—for example, the Vancouver house lies in an earthquake-prone region, while hail is more likely to affect the Calgary house.

So, while both homes are insured for the same value, the insurer would calculate their exposure differently for each home.

Earthquake coverage presents a serious exposure; earthquakes are unpredictable and capable of completely destroying a home. Insurance companies have options for addressing this, of course. They can charge a little more to insure homes in earthquake zones.

Alternatively, an insurer could reduce their earthquake exposure by excluding earthquakes from their policies and allowing customers to add it as an optional extra coverage for additional premium.

Basically, exposure is a measurement of risk. Risk can be rated on frequency (how likely is something to happen?) and severity (how bad will it be if it happens?). As either of those factors increase, the insurer’s exposure increases, and so they must increase the cost they charge in order to be prepared for future claims.

For more information about premiums specifically, check out our in-depth article on calculating premiums.