Long-Tail Liability: What it is, How it Works, Examples

What Is a Long-Tail Liability?

A long-tail liability is a type of liability with a long settlement period that may result in high incurred but not reported (IBNR) claims.

Key Takeaways

• A long-tail liability is a liability with a long settlement period.
• Liability insurance claims often involve large sums of money and can result in a settlement or a lengthy court case.
• Examples of long-tail liabilities include medical malpractice, employment discrimination, and child abuse cases.

Understanding a Long-Tail Liability

Settlement periods for insurance claims can vary, with liability claims often classified as long-tail liabilities. New claims are often filed long after the claim event occurred due to various reasons:

• Liability claims involve large sums of money compared to other types of claims.
• Liability claims can lead to a settlement or a lengthy court case.
• Insurance companies investigate claims thoroughly to ensure they are made in good faith.

Financial Impact of Long-Tail Liabilities

Insurance companies that cover long-tail risks may have higher investment income ratios, allowing them more time to earn a higher rate of return.

However, policies covering long-tail liabilities tend to have higher loss ratios and combined ratios, affecting the profitability of an insurer.

Special Considerations

Proper record keeping is crucial for companies facing potential long-tail liability claims. Keeping old records until insurance policies can be determined is essential.

If an old liability policy is missing, secondary evidence can be used to prove its existence.

Examples of Long-Tail Liability Claims

Common examples of long-tail liability claims include occupational disease claims, medical malpractice, cyber liabilities, employment discrimination, and child abuse.