Exposure vs sales under ISO
Hi,
For NCCI, it's clear that the exposure for rating is the payroll/100. However, what is the rule for ISO? For example in the Excel Question 3, we just use the sales amount as exposure. In the ISO file, it seems like they gave an example using sales/1000 as exposure. Could you let us know what do you think as the default option in the exam?
Thank you,
CFX
Comments
The key here is identifying whether or not there has been a dramatic change in the exposures for the policy.
If there is no dramatic change then you use the annual basic limits company premium for the risk (multiple this by the expected loss ratio to get the basic limits expected loss). This is the manual premium charged by the ISO plan and isn't part of the study kit/syllabus. It would be given to you on the exam.
However, if there is a material shift in the exposures then you use either:
a. Present Average Company Rate approach - this adjusts the prospective exposure back to the historical levels. Or,
b. Historical Exposures at Present Company Rates approach - here you re-rate the historical data using today's rates.
It seems like you are most likely to have no dramatic shift in exposures based on the past exams released by the CAS.
Thank you for the explanation. But my question is, when we use approach b with historical sales and current rate, should the rate apply to the sales or sales/1000. In the ISO paper, it seems that they use sales/1000 as exposure base to apply the rate for approach b but in our Question 3 of Excel file, we use sales * rate. I would guess it will be more clear in the exam or otherwise we could state our assumption. Right?
The ISO manual isn't particularly clear in our opinion. What you're trying to do is use a consistent exposure base throughout the problem. This could be gross sales or gross sales / 1000.
If the sales given in the exam are in the millions then I would expect to use gross sales / 1000. Hopefully the CAS will make it more clear should they ask this type of question. Either way, stating your assumption will not hurt.
Yeah, that is also my understanding. Thank you for the confirmation!