What is a "Loss Exposure" in Insurance?

There are too many insurance terms for the average person to understand and this is why it is important to take some time to educate yourself in insurance. You will spend a lot of money in your lifetime on insurance premiums for various types of insurance, so why not know what you are paying for up front? One of the more important terms in insurance is a "loss exposure" as it will play a big role in determining the premium your insurance company will charge you. Here is a little bit of information to explain what a "loss exposure" is.

First, the AICPCU (American Institute for Chartered Property Casualty Underwriters) defines a loss exposure as: "Any condition or situation that presents a possibility of loss, regardless of whether loss actually occurs." This is how insurance operates in general, to assess the potential of a loss occurring regardless of if it has or will occur. In the end you may never encounter a loss but your premiums help pay for the other people that do experience a loss as you have all pooled together to combat unforeseen losses.

There are three different steps, or terms, that define a loss exposure. The first is the "asset exposed to loss" which is the exact item or property that was damaged or destroyed. This could be jewelry, a big screen television or any other item of value. An asset that is exposed to a loss could be any item of value that could lose value after suffering a loss.

The next term that defines loss exposure is "cause of loss" or "peril". This defines the actual action or even that occurred and caused the damage or destruction of the asset. For instance, if your car is in a hail storm and suffers damage the car is the asset and the peril or "cause of loss" is the hail storm. Insurance companies in this instance would have charged coverage, in part, based on the prevalence of hail storms in your area.

The third part of the loss exposure equation is the "financial consequences of loss". The financial consequences of a loss will depend on the asset that was damaged or destroyed as well as the cause of loss that destroyed it. Different types of damage could result in different levels of financial consequence to different assets. For instance, damage to your bumper on your car could cause cosmetic damage that hurts the value of the car, but flooding to your home could cause you to lose the use of your home. These are both financial consequences, but one is more severe than the other.