What Is an Insurance Exposure Unit?

In the world of insurance, many commonplace words take on different, more specific or technical meanings. This is true of the term "exposure." Exposure in insurance can refer to either exposure on the part of the insured or exposure on the part of the insurance company. In both cases, it's a way of quantifying and describing risk, and it's measured in generic "exposure units" that change depending on the context.

Exposure refers to the risk associated with an insured party due to the typical or normal operations of the individual, business or other entity. This refers to the potential for accidents or other types of loss due to reasons such as crime, fire or natural disasters. This translates to how likely and how much the insurance company would have to pay out in the event of a loss. The insurance company will decide a value for one unit of exposure in a given context, then multiply that by the insured party's rate per unit to obtain the premium the insured party will pay.

Exposure units are measured differently based on context. For an auto insurance policy, an exposure unit may equate to 100 miles driven, while for property insurance, one exposure unit could be $1,000 of property value. A $1 million property represents a larger risk to the insurance company than a $50,000 property in the event of a fire and total loss.

Likewise, every minute spent on the road or every mile driven in a vehicle means a higher likelihood of getting into an accident, even if it's not the insured driver's fault, so the exposure units for auto insurance are typically measured in miles driven. There's actually even more to auto insurance. Liability insurance is typically measured in miles driven, but collision insurance exposure units are typically measured in the worth of the vehicle, such as every $1,000 of the vehicle's value.

For workers' compensation insurance, a typical exposure unit could be $1,000 of payroll. With liability coverage for a store or business, the exposure units may be measured in the number of customers or the number of sales.

From the insurance company's perspective, exposure means the company's risk of loss for insuring a given party. Just like insured parties are subject to risk based on their characteristics and activities, insurance companies are exposed to risk based on the parties they are insuring.

Once an insured entity is assigned a particular number of exposure units, this is then multiplied by the insured party's rate per unit. This will depend on many characteristics of the insured party. The sum of exposure units is called the exposure base, to which rates are applied to determine a premium.

For the auto liability insurance example, we can imagine two drivers, Basira and Vlad, who both drive 20 miles a day to and from work in vehicles of roughly equal value. While their exposure units are the same, their insurance rates and premiums may be different. Vlad has been in several accidents over the course of the last few years, while Basira has been in none. Basira has also consented to have the insurance company's app track her movements, which shows the company that she always obeys the speed limit.

Furthermore, Basira has a better credit score than Vlad and is a woman in her 40s, while Vlad is a man in his mid-20s. Taking these and other factors into account, an auto insurance company would likely assign Basira a lower rate per unit of exposure than Vlad because they see her as a lower-risk investment. She seems less likely to get into an accident than Vlad, so the insurance company is less worried about taking a loss from her and is willing to have her pay a lower premium.

These kinds of calculations are used throughout the insurance industry for every type of insured party. A company manufacturing pharmaceuticals will likely have a higher rate than a company manufacturing furniture, and a company doing assembly line work is likely to have a higher rate than a company doing office work.