I have just installed an outdoor security light with a junction box I bought (weatherproof). I wired the old red source wire to the new brown, old black source wire to the new blue in the terminal block, but noticed the third ground wire was just exposed copper. I wired that to the new yellow and green, but wondered why is it exposed, and will it function OK? I put some electrical tape round it as a little bit of it was still exposed outside the inlet to the junction box. Previously all 3 wires were completely exposed in the terminal block from the previous occupant, which was a little worrying!
Assuming that it's twin and earth wiring (which it sounds like from your description), yes the earth wire in the cable is typically uninsulated once the outer sheath has been removed. It's usual to use a piece of yellow and green sleeving to slip over the earth wire to provide basic insulation.
I'd recommend that you run the outer sheath of the cable into the junction box, or you could likely run into water ingress issues in the future.
As to why it's exposed, I'd hazard a guess that it's a cost saving measure to avoid the additional insulation. Except in a fault condition, there should be no current in or potential on the earth conductor, so it doesn't need the same level of protection as the line conductors.