How do underwriters evaluate risk using exposure units and rating factors in commercial policies?

How do underwriters evaluate risk using exposure units and rating factors in commercial policies?

• A. They ignore exposure units and rating factors.
• B. They assess exposure units (such as per $1 of revenue, per $100 of payroll) using rating factors (industry, location, size, controls, claims history) to determine premium.
• C. They use random selection for rating.
• D. They always use a flat premium regardless of risk.

Answer: (B)

Underwriters price commercial policies by tying the premium to an exposure unit and then adjusting with rating factors. An exposure unit is a standard measure of risk exposure, such as per $1 of revenue or per $100 of payroll, which scales the premium to the size and activity of the business. Rating factors are the variables that reflect risk differences—industry, location, size, controls, claims history, and other characteristics—that modify the base rate. The insurer applies a base rate to the number of exposure units and then applies these factors to determine the final premium. This approach ensures that riskier profiles cost more and safer profiles cost less than a flat premium would.

Underwriters price commercial policies by tying the premium to an exposure unit and then adjusting with rating factors. An exposure unit is a standard measure of risk exposure, such as per $1 of revenue or per $100 of payroll, which scales the premium to the size and activity of the business. Rating factors are the variables that reflect risk differences—industry, location, size, controls, claims history, and other characteristics—that modify the base rate. The insurer applies a base rate to the number of exposure units and then applies these factors to determine the final premium. This approach ensures that riskier profiles cost more and safer profiles cost less than a flat premium would.