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E. Loss Exposure

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Key Takeaways
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Educational Objectives
  • I.A.8. Identify a definition or the correct usage of the term loss exposure
  • I.A.9. Identify risk management techniques
  • I.A.10. Identify risk situations that present the possibility of a loss
  • I.A.15. Identify the meaning of adverse selection and profitable distribution of exposures

Exposure is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates:

  • The age of the insured;
  • Medical history;
  • Occupation; and
  • Sex.

A large number of units having the same or similar exposure to loss is known as homogeneous. The basis of insurance is sharing risk among the members of a large homogeneous group with similar exposure to loss.

How Risk Becomes a Claim
Hazards
  • Conditions and actions that increase risk or probability of loss
Perils
  • Causes of loss
Loss
  • Reduction of value
  • Basis for a claim
Insurance
  • Transfer of loss
  • Protection
Know This

A risk is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss.

A profitable distribution of exposures (or spread of risk) exists when poor risks are balanced with preferred risks, with "average" or "standard" risks in the middle. The purpose behind distributing risks in this manner is to protect the insurer from adverse selection. This is one of the key principles of insurance.