What is risk exposure?

Risk exposure is the quantified potential loss from business activities currently underway or planned. The level of exposure is usually calculated by multiplying the probability of a risk incident occurring by the amount of its potential losses.

How do insurance companies determine risk exposure?

Insurance companies determine risk exposure through a process known as underwriting. Therefore, the critical steps in determining risk exposure are application and information gathering, risk assessment and analysis, probability and loss estimation, setting premiums, and ongoing monitoring and adjustments.

How can risk exposure be modeled?

Risk exposure can also be modeled as a continuous curve whereby a probability is given for every possible loss. For example, a product failure that can cost at most $200,000 can be modeled with a probability for every possible dollar amount such as a 0.0004% chance of a $10,000 loss and a 0.0003999% chance of a $10,001 loss.

What are the steps in determining risk exposure?

Therefore, the critical steps in determining risk exposure are application and information gathering, risk assessment and analysis, probability and loss estimation, setting premiums, and ongoing monitoring and adjustments. This has been a guide to what risk exposure is and its definition.