Exposure units: Difference between revisions

From CEOpedia | Management online
(The LinkTitles extension automatically added links to existing pages (<a target="_blank" rel="noreferrer noopener" class="external free" href="https://github.com/bovender/LinkTitles">https://github.com/bovender/LinkTitles</a>).)
m (Infobox5 upgrade)
 
(One intermediate revision by the same user not shown)
Line 1: Line 1:
{{infobox4
|list1=
<ul>
<li>[[Mortgage redemption insurance]]</li>
<li>[[Gross Income Multiplier]]</li>
<li>[[Non current liability]]</li>
<li>[[Implicit interest rate]]</li>
<li>[[Indemnity principle]]</li>
<li>[[Yield maintenance]]</li>
<li>[[Debt service coverage]]</li>
<li>[[Gross fixed assets]]</li>
<li>[[Accrual rate]]</li>
</ul>
}}
'''Exposure units''' - It is a term mostly used in [[insurance]] sector. To understand what the '''exposure''' units are, it is necessary to start with definition of exposure. As J. F., and J. F. C. Outreville wrote<ref>Outreville J. F., Outreville J. F. C., 1998, p.7</ref>: "exposure is a defined asset (human or physical) subject to a defined peril". To extended the background of exposure meaning it is worth to quote the definition of '''loss exposure''' <ref>Outreville J. F., Outreville J. F. C., 1998, p.7</ref>: "loss exposure: The potential [[financial loss]], or the monetary amount that is involved in the exposure".
'''Exposure units''' - It is a term mostly used in [[insurance]] sector. To understand what the '''exposure''' units are, it is necessary to start with definition of exposure. As J. F., and J. F. C. Outreville wrote<ref>Outreville J. F., Outreville J. F. C., 1998, p.7</ref>: "exposure is a defined asset (human or physical) subject to a defined peril". To extended the background of exposure meaning it is worth to quote the definition of '''loss exposure''' <ref>Outreville J. F., Outreville J. F. C., 1998, p.7</ref>: "loss exposure: The potential [[financial loss]], or the monetary amount that is involved in the exposure".
The '''exposure units''' term is deeply connected with '''loss exposure'''. Exposure units also shows potential loss for insurer not in monetary amount, but in units<ref>Friedland J., 2013, p.48-49</ref>.
The '''exposure units''' term is deeply connected with '''loss exposure'''. Exposure units also shows potential loss for insurer not in monetary amount, but in units<ref>Friedland J., 2013, p.48-49</ref>.
Line 56: Line 41:
==Footnotes==
==Footnotes==
<references />
<references />
{{infobox5|list1={{i5link|a=[[Actual cost]]}} &mdash; {{i5link|a=[[Insurance risk]]}} &mdash; {{i5link|a=[[Cost model]]}} &mdash; {{i5link|a=[[Average clause]]}} &mdash; {{i5link|a=[[Unearned premium reserve]]}} &mdash; {{i5link|a=[[Period of indemnity]]}} &mdash; {{i5link|a=[[Deterministic effect]]}} &mdash; {{i5link|a=[[Insured peril]]}} &mdash; {{i5link|a=[[Capture rate]]}} }}


==References==
==References==

Latest revision as of 19:01, 17 November 2023

Exposure units - It is a term mostly used in insurance sector. To understand what the exposure units are, it is necessary to start with definition of exposure. As J. F., and J. F. C. Outreville wrote[1]: "exposure is a defined asset (human or physical) subject to a defined peril". To extended the background of exposure meaning it is worth to quote the definition of loss exposure [2]: "loss exposure: The potential financial loss, or the monetary amount that is involved in the exposure". The exposure units term is deeply connected with loss exposure. Exposure units also shows potential loss for insurer not in monetary amount, but in units[3].

Usefulness

Exposure units are usful to calculate the premium that ans insured person pays for range of the protection[4]. To calculate the premium, insurer has to multiply the rate by the amount of exposure units. The number of exposure units depends on type of insurance. E.g. to calculate the premium when rate is 50, and the number of exposure units is 200, the premium is equal to 10 000 (200x50) exposure units. The premium calculated in exposure units is more clearly for insurer because insured does not know what is the monetary value of the premium[5].

Monetary units

Exposure units have they own value in monetary units. Value of monetary units depends on what insured want to secure[6]. The monetary value of two different kinds of exposure units can be totally different, as J. F., and J. F. C. Outreville wrote[7]:

  • "in property and liability insurance, the exposure unit is generally 100 monetary units (dollars, ecus, pounds, francs, pesos, etc.)"
  • "in life insurance, the exposure unit is 1,000 monetary units"

example shows that life insurance is much more expensive than e.g. insurance of property.

Examples of Exposure units

  • Property Exposure Unit: This is an exposure unit that measures the risk of financial loss due to physical damage to a property, such as a building or a piece of machinery. It considers factors such as the size, location, and value of the property, as well as the probability of any potential damage.
  • Liability Exposure Unit: This is an exposure unit that measures the risk of financial loss due to legal liabilities, such as personal injury caused by an accident or property damage due to negligence. It takes into account the potential costs of legal defense and any potential damages that may be awarded.
  • Business Interruption Exposure Unit: This is an exposure unit that measures the risk of financial loss due to disruption of business operations, such as due to a natural disaster or a labor strike. It takes into account the potential costs associated with the disruption, such as lost profits and wages, as well as any potential costs associated with restoring operations.

Advantages of Exposure units

Exposure units are an important tool used in insurance, as they help to accurately quantify risk. Some of the advantages of using exposure units to measure risk include:

  • They provide a standardized measure of risk, allowing for an apples-to-apples comparison of potential losses.
  • They enable the insurer to identify and quantify the potential frequency and severity of risks.
  • They allow for the development of a risk profile across different policies and sectors, enabling insurers to quickly and accurately assess risk.
  • They can be used to identify and address potential issues with existing policies, and to develop new policies to better manage risk.
  • They provide a better understanding of the amount of risk an insurer is taking on, and can be used to set up sufficient reserves.

Limitations of Exposure units

  • Exposure units are limited by the accuracy of the data used to calculate them. If the data is inaccurate or incomplete, the exposure units may not properly reflect the total financial risk.
  • Exposure units are also limited by the scope of the analysis. For example, if an insurer is only calculating the exposure units for one type of event, they may not be taking into account the potential financial losses from other types of events.
  • Exposure units are also limited by the assumptions that are made in the calculation process. For example, if an insurer assumes that a certain percentage of losses will be recovered, they may be underestimating the total financial risk.
  • Exposure units are also subject to the limitations of the specific risk model that is being used. If the model is not sophisticated enough, it may not be able to capture the full scope of risk.
  • Finally, exposure units are limited by the time frame in which the analysis is conducted. If the analysis is conducted over a short period of time, the exposure units may not account for changes in risk over time.

Other approaches related to Exposure units

  • Loss Exposures: Loss exposures, as mentioned before, refer to the potential financial losses that can be incurred due to the particular exposure. These losses can be direct, indirect, or consequential.
  • Risk Exposures: Risk exposures are the potential risks associated with a particular exposure and their effects on financial losses. These include both physical and non-physical risks, such as cyber-security risks, financial risks, and other operational risks.
  • Liability Exposures: Liability exposures refer to the potential legal liabilities that can arise due to a particular exposure. These can include product liability, professional liability, and various other legal liabilities.
  • Coverage Exposures: Coverage exposures refer to the potential coverage gaps that may exist in a particular insurance policy. These may include gaps in coverage, inadequate or improper coverage limits, or other coverage issues.

In summary, exposure units are a measure of risk that can be used to assess the potential financial losses, risks, liabilities, and coverage gaps associated with a particular exposure. They are an important tool for understanding and managing the financial and operational risks associated with any given exposure.

Footnotes

  1. ↑ Outreville J. F., Outreville J. F. C., 1998, p.7
  2. ↑ Outreville J. F., Outreville J. F. C., 1998, p.7
  3. ↑ Friedland J., 2013, p.48-49
  4. ↑ Friedland J., 2013, p.316
  5. ↑ Outreville J. F., Outreville J. F. C., 1998, p.147
  6. ↑ Outreville J. F., Outreville J. F. C., 1998, p.147
  7. ↑ Outreville J. F., Outreville J. F. C., 1998, p.147


Exposure units — recommended articles
Actual cost — Insurance risk — Cost model — Average clause — Unearned premium reserve — Period of indemnity — Deterministic effect — Insured peril — Capture rate

References

Author: Michał Skrabski

Retrieved from "https://ceopedia.org/index.php?title=Exposure_units&oldid=90785"