Page 242 - ic92 actuarial

The Insurance Times

The concept of base exposure is important for two
reasons. First it adjust for the differences in costs for
the different insured in much the same way that earned
premiums do. E.g it makes an appropriate adjustment I
one territory has an higher proportion of high class
relativity insured than another.

Secondly ,it facilitates an iterative procedure for
producing more accurate relativities as opposed to
stopping after the first iteration. Sometimes the base
exposures take the place of premium at current
rates. The preliminary adjustment is then based on
relative pure premiums , where the pure premiums
are the incurred losses divided by the base
exposures.

The credibility adjustment and the balancing adjustment
using base exposures on current business is done ( rather
than using actual exposure) to make the territorial
adjustment revenue neutral. The results can sometimes
vary depending on the approximation technique used to
calculate premiums at current rates.

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