A long-tail liability represents a type of liability characterized by an extended settlement period. These liabilities often lead to significant incurred but not reported (IBNR) claims, given the extensive duration it takes to resolve them. Here’s a deeper look into long-tail liabilities and their implications.
Key Takeaways
- Extended Settlement Periods: Long-tail liabilities have protracted settlement timelines.
- Involving Large Sums: Liability insurance claims frequently entail substantial monetary amounts and prolonged court cases.
- Typical Examples: Common instances of long-tail liabilities include medical malpractice, employment discrimination, and child abuse cases.
Exploring Long-Tail Liabilities
The classification of an insurance claim as a long-tail liability or short-term largely depends on the risk type being covered. While property insurance claims typically undergo swift resolution, liability insurance claims are often deemed long-tail liabilities. Various factors contribute to this extended timeline:
- Large Sums Involved: Liability insurance claims usually entail larger financial amounts compared to other insurance types.
- Protracted Legal Processes: These claims can lead to settlements in addition to lengthy court proceedings.
- Thorough Investigations: Insurance companies diligently investigate claims to ensure their legitimacy and guard against fraudulent activities.
Financial Impact of Long-Tail Liabilities
Insurers providing coverage for long-tail risks typically exhibit higher investment income ratios (net investment income divided by earned premiums) as opposed to those covering short-term liabilities. Here’s a breakdown of the financial impact:
- Investment Opportunities: Insurers have extended timelines between premium collection and claim payout, allowing more time to invest and potentially earn higher returns.
- Higher Loss and Combined Ratios: Despite the beneficial investment gap, policies covering long-tail liabilities exhibit higher loss ratios (losses incurred divided by earned premiums) and combined ratios (losses plus loss adjustment expenses divided by earned premium). A combined ratio below 100% indicates an insurer’s profitability, whereas a ratio above 100% implies greater claim payouts than premium collection.
Special Considerations
Considering that long-tail liability claims can span years or even decades before resolution, meticulous record keeping is pivotal. Entities facing potential long-tail claims must maintain comprehensive archives of old records to establish evidence of insurance policies when claims arise.
When original liability policies are unavailable, secondary evidence must demonstrate the policy’s existence. Such corroborative materials include corporate minutes, accounting ledgers, annual reports, internal communications, transactional records, and personal calendars. Crucially, locating the policy number is essential.
Real-World Examples of Long-Tail Liability Claims
Occupational Disease
Claims related to prolonged exposures, such as asbestos and environmental air pollution, fall under long-tail liabilities as the impacts may manifest over many years.
Medical Malpractice
These claims entail cases where patients sue medical professionals for negligence or malpractice months or even years after the procedure.
Cyber Liabilities
Claims covered under cyber insurance policies providing compensation for damages following cybersecurity breaches represent another example.
Employment Discrimination
Employment-related claims where plaintiffs allege workplace discrimination typically involve long settlement durations.
Child Abuse
Sensitive and complex cases involving child abuse often take longer durations to resolve, highlighting the long-tail liability nature.
Related Terms: liability insurance, incurred but not reported (IBNR), investment income ratio, loss ratio, combined ratio.
