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Foundations of Casualty Actuarial Science

expected loss rate can be adjusted to the appropriate
dollar level. E.g, to develop expected loss rates for a
prior period, the current expected loss rate could be
adjusted to the prior period's dollar level, or the prior
period's expected loss can be used directly.

The former approach is usually better in case there is
no underlying change in the nature of the exposure
because the current expected loss rate is based on more
recent information than the prior period's loss rates.

The exposure base used should reflect the underlying
risk of loss and ALAE.

It is not always possible to use theoretically optimal base.
In practice, insurers and non-traditional risk financing
mechanisms often use whatever exposure base insurers
use in their premium calculations.

E.g, for general liability, exposure bases often used are
sales, payroll, total operating expenditures, and square
footage, adjusted for any underlying differences.

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