A product-liability underwriter can charge per unit sold, per $1,000 of sales, or per employee. All three are measurable, but only one tracks how risk actually grows. Choosing among candidates, and defending the pick, is the skill this lesson drills.
An exposure base is the unit premium is charged per. Choosing one means comparing candidates against three criteria. The source lists all three as criteria of a good exposure base and ranks none of them above the others.
KEY: Proportional to expected loss, practical, and consistent with precedent. The source treats none of the three as a gate or a tie-breaker, so weigh every candidate on all three together. Changing an established base carries transition costs that must be weighed against any gain.
Proportional to expected loss. As the base doubles, expected loss should roughly double. Payroll works for workers comp because more payroll means more worker-hours and more injury exposure. Candidates often differ most on this criterion, but it does not outrank practicality or precedent.
Common mistakes
- Ignoring practicality when a base is loss-proportional. A loss-proportional base that the insured can understate still falls short on practicality, and that weakness counts against it when you weigh the candidates on all three criteria.
- Defending a base by praising it in isolation. A defense must beat each rival on a named criterion, not just list virtues of the winner.
- Trending a fixed-count base. A car-year does not inflate. Applying growth to car-years invents exposures that do not exist.
Bottom line
- A good exposure base clears three tests: proportional to expected loss, practical (objective, cheap, verifiable, hard to manipulate), and consistent with historical precedent.
- The source ranks none of the three criteria, so weigh every candidate on all of them.
- A base change carries three transition costs: large premium swings for individual insureds, rating algorithm and systems rework, and significant data adjustments for future analyses.
- Auto uses car-years, workers comp uses $100 of payroll, homeowners uses house-years, general liability and products use sales or receipts, physicians use per-doctor counts.
Exam shortcut
When a scenario lists candidate bases, score each one on all three criteria (proportional to expected loss, practical, historical precedent); the source applies them in no fixed order. To reject a candidate in one sentence, name the criterion it violates and the two risks it misprices ("equal crews, unequal receipts"). Graders reward the specific mispriced pair, not vague criticism.
The full lesson (about 2,046 words, 14 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- A2
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