Loss Estimation: The Exposure Approach

The estimation of ultimate losses for a particular year is consistently one of the most formidable tasks facing the actuary. Rather than focusing on and manipulating the data reported by the loss process, this paper presents a model of the loss process itself. Changes in claim counts, average values, and incurred losses are viewed as manifestations of changes in underlying characteristics of a book of business. The paper focuses on these underlying factors, describes a technique to measure them, and presents a framework to project their impact on ultimate losses.