C4 : exposure and expected claims

[Course 5 Zoombie]

may i know what is the difference between the meaning of exposure and expected claims?
exposure always > expected claims?

[Minerva]

The two are not at all the same.

Exposure is a measure of the amount of risk you are "exposed" to. For example, your exposure might be measured in terms of average death benefit in force for a block of life insurance policies. (For the sake of an example, you might be exposed to $1,000,000 of risk for a given block for a given benefit for a given time period.)

Expected claims are a measure of what you expect your claim amount (or payout) to be. For example, if you expect to pay out 3.5% of the death benefit in force for the block of life insurance policies above, your expected claims would be $350,000. [The 3.5% might have been derived from a number of sources and on several different bases - e.g., conservative, best estimate, regulatory tables, etc..]

It is not an absolute that your exposure > expected claims, but it is the norm. IT DEPENDS on how you measure your exposure (face amount, net amount at risk, premium, policies, etc.) and how large your expected claims risk is.

Funky example off the top of my head - You have a block of policies with a fixed death benefit, for an average inforce of the aforementioned $1,000,000. BUT, there is a clause in the policy that doubles the death benefit if the person dies of a bizarre disease that you have neglected to underwrite for AND you find that all of the policies sold so far have been issued to inmates of a sanitarium specializing in this disease. Since the disease kills people off within 2 years, you have adjusted your expected claim rate to 108%, for expected claims of $1,080,000. You have also recommended better underwriting and disciplinary action for the agent - which advice will undoubtedly be ignored until AFTER the million has been paid and the company has issued another $25,000,000. Welcome to life as an actuary.

[Course 5 Zoombie]

thank you ^_^