Claims-made coverage was introduced to the marketplace in the late 1970s and 1980s through carriers such as St. Paul Companies during a medical malpractice crisis, and it became the predominant coverage by the early 2000s. The coverage helped to combat rising malpractice insurance premiums and offered the advantage of improved predictability, thus reducing the uncertainty of pure late-reported claims, reflected in savings through a reduced contingency provision incorporated in insurance rates. Previously, many malpractice insurance policies were written on an occurrence basis.
An occurrence-based insurance policy will cover claims that arise from incidents that occur during the period coverage is in place, regardless of when it is reported. A claims-made policy will only cover claims that are reported during the policy period and occurred after a retroactive date (or prior acts date). Therefore, if an incident giving rise to a claim occurs during the insurance policy period, but it is not reported until after the policy expires, then it is not covered by the current insurance policy. The retroactive date is usually the start date of the first claims-made policy unless tail coverage has been purchased. In addition, a policy will have a limit or retention, in which case only claim amounts within the layer of the policy, capped at the uppermost limit of the policy, are covered.
Claims reported after the expiration date of the claims-made policy, not covered by the policy, are known as tail claims. A tail policy, an extended reporting endorsement, accounts for the difference between an occurrence policy and a claims-made policy. Another common term is nose coverage, which refers to claims occurring on or after the retroactive date but before the start of the next claims-made policy that have not yet been reported. Nose claims usually are covered in the next claims-made policy by the retroactive date and are an ongoing concern when renewing claims-made coverage, while tail claims exist if claims-made coverage ends or there is a switch to a different carrier without coverage for nose claims. Purchasing tail coverage effectively converts a claims-made policy into occurrence coverage and a new retroactive date will begin with the next claims-made policy. A tail does not exist for an occurrence-based policy.
The pattern of how claims are reported from an occurrence year is referred to as a claims reporting pattern and determines step factors. Step factors convert mature claims-made rates to first year, second year, and so on. Claims-made coverage has a rate schedule wherein the first claims-made year is the lowest and increases each year until a claims-made mature status is reached, generally about the seventh year of a claims-made program.
The exhibit below shows a program that had occurrence coverage in 2010 and then switched to claims-made coverage in 2011.
Richard C. Frese, FCAS, MAAA, is a consulting actuary, Milliman, Chicago.
Ryan J. Weber, CPA, is a partner, McGladrey, Fort Lauderdale, Fla..
For more information, see Richard Frese and Ryan Weber's " Managing "Tail Liability", hfm, November, 2013
Publication Date: Thursday, November 07, 2013