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Long-Tail Liability What it is How it Works Examples

Long-Tail Liability What it is How it Works Examples

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.

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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.

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