B.8 Claims-Made Ratemaking

Question 1

What is a coverage trigger?

Answer 1

A coverage trigger is the event that must occur in order for an insurance policy to apply to a claim.

Question 2

Two types of coverage triggers in insurance

Answer 2

1. Occurrence: Occurrence policies cover claims that occur during the effective policy period, regardless of when the claim is reported to the insurer. The coverage trigger on these policies is the occurrence of the accident.
2. Claims-made: Claims-made policies cover claims that are reported to the insurer during the effective policy period, regardless of when the claimoccurred. The coverage trigger on these policies is the reporting of the claim.

Question 3

Purpose of a retroactive date provision

Answer 3

A retroactive provision limits claims covered under a
claims-made policy to only claims that occur after the start of the first claims-made policy term (and are reported during a claims-made policy term). This prevents coverage overlap with any prior occurrence policies.

Question 4

Purpose of an extended reporting endorsement

Answer 4

To allow for claims that occur during a claims-made policy period, but are reported after the claims-made policy expires. This is commonly used when the insured retires or switches from a claims-made policy to an occurrence policy.

Question 5

Claims-Made Ratemaking Principles

Answer 5

1. A claims-made policy should always cost less than an
   occurrence policy as long as claim costs are increasing.
2. If there is a sudden, unpredictable change in the underlying trends, the claims-made policy priced based on the prior trend will be closer to the correct price than an occurrence policy based on the prior trend.
3. If there is a sudden, unexpected shift in the reporting
   pattern, the cost of a mature claims-made policy will be
   affected relatively little, if at all, relative to the occurrence
   policy.
4. Claims-made policies incur no liability for pure IBNR, so
   the risk of reserve inadequacy is greatly reduced.
5. The investment income earned from claims-made policies is substantially less than under occurrence policies.