Discovery periods and statutes of limitations heavily impact the nature of property/casualty insurance products
Long-tail insurance business involves claims that may be made long after the end of the insured period. These claims typically involve a claim period that is several years long—resulting in high amounts of incurred but not reported claims.1 Malpractice claims are a common example of long-tail insurance business, but other examples may include employment discrimination, certain cases of child abuse, and similar claims that require a lengthy settlement process.2
Meanwhile, short-tail insurance typically involves claims that are resolved relatively close to the exposure or occurrence that triggered the coverage. Common examples of short-tail insurance business include health or auto coverage.1
While statutes of limitations vary by state—and the circumstances surrounding a claim will vary—a general guideline is that long-tail insurance business takes over two to five years for a claim to be settled, while short-tail insurance claims can often be settled in less than two to five years.1
Insurance companies that offer coverage for long-tail risks may have higher investment-to-income ratios (net investment income divided by earned premium).2 Policies covering long-tail risks typically have a larger gap between the time the premium is collected versus when any claims on that policy will need to be paid.
It is not uncommon for it to take years for a malpractice claim to go to trial. This puts significant pressure on professional liability insurers to ensure adequate pricing on their policies. The premium collected must be adequate to cover all claims-related expenses throughout the life of the claim. There is also significant pressure on both the insurance company and its insureds to maintain proper record keeping. Careful record retention and documentation are essential to both addressing regulatory requirements and ensure the ability to provide the strongest possible defense should a case make its way to trial.
1. Society of Actuaries. “Glossary”
2. Investopedia. “Long-Tail Liability: What it is, How it Works, Examples”