Exposure Rating for Excess of Loss Reinsurance

Exposure Rating Fundamentals

Exposure rating prices reinsurance based on the distribution of insured values and policy limits rather than historical loss experience. This approach is especially useful when loss data is sparse, such as for high-layer excess treaties or new programs. The method relies on exposure curves (also called first loss scales) that describe the expected proportion of total losses occurring within various layers of coverage.

Applying Exposure Curves

Standard exposure curves are published by organizations such as Swiss Re and Lloyd's. The actuary applies these curves to the cedant's subject premium and limit profile to estimate expected losses in each reinsurance layer. Key inputs include the distribution of policy limits, attachment points, and the expected ground-up loss ratio. Adjustments may be needed for clash potential (multiple policies affected by a single event), trend, and differences between the cedant's portfolio and the exposure curve's underlying data. The results are typically compared to experience-rated estimates for reasonableness.