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📐 '''Exposure rating''' is a [[Definition:Pricing | pricing]] methodology — used primarily in [[Definition:Reinsurance | reinsurance]] — that estimates the expected cost of covering a layer of risk based on the characteristics of the underlying [[Definition:Exposure | exposures]] rather than on the cedent's historical [[Definition:Loss | loss]] record. Where [[Definition:Experience rating | experience rating]] looks backward at what has already happened, exposure rating looks at what could happen given the profile of the [[Definition:Portfolio | portfolio]], making it especially valuable for risks with sparse or volatile claims histories, such as high-excess [[Definition:Catastrophe reinsurance | catastrophe]] or [[Definition:Casualty insurance | casualty]] layers.

⚙️ The technique works by mapping the ceding company's [[Definition:Exposure data | exposure data]] to an expected loss distribution. In property catastrophe reinsurance, [[Definition:Catastrophe model | catastrophe models]] generate [[Definition:Exceedance probability curve | exceedance probability curves]] that translate exposure attributes — location, construction, value, [[Definition:Policy terms | policy terms]] — into modeled losses at various return periods. The reinsurer then reads off the expected loss to its specific [[Definition:Attachment point | attachment point]] and [[Definition:Limit | limit]], loads for [[Definition:Expense | expenses]] and profit, and arrives at a technical [[Definition:Premium | premium]]. In casualty lines, exposure rating may instead rely on [[Definition:Increased limits factor | increased limits factors]] or [[Definition:Loss distribution | severity curves]] applied to ground-up [[Definition:Expected loss | expected losses]] derived from [[Definition:Classification code | class]]-level benchmarks. The approach naturally complements experience rating, and most [[Definition:Underwriter | underwriters]] triangulate between both methods — along with market pricing benchmarks — before settling on final terms.

💡 Exposure rating's greatest strength is its ability to price layers that sit above historical loss penetration, where experience data offers little guidance. A reinsurer quoting a $50 million excess of $50 million layer on a property treaty may find that the cedent has never suffered a loss that large, rendering experience rating nearly silent on the cost of that coverage. Exposure rating fills that gap by leveraging the scientific and statistical frameworks embedded in modern cat models. As [[Definition:Insurtech | insurtech]] platforms improve the granularity and speed of exposure data collection, the precision of exposure-rated pricing continues to sharpen — particularly for emerging perils like [[Definition:Cyber insurance | cyber risk]] and [[Definition:Climate risk | climate-driven]] natural catastrophes where historical data is inherently limited.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Experience rating]]
* [[Definition:Catastrophe modeling]]
* [[Definition:Attachment point]]
* [[Definition:Exceedance probability curve]]
* [[Definition:Reinsurance]]
* [[Definition:Increased limits factor]]
{{Div col end}}

Definition:Exposure rating - Revision history

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