Fencing in Long-Tail Claims

As all claim executives know, much of the real work comes long after insurance policies are sold and the brokers’ celebratory signing lunches have faded from memory. The ultimate test of how well policies were underwritten — and how profitable any given book of business will be — is not only the number and nature of the claims handled under those policies but also the management of those claims and their related expenses.

Insurance companies and claim personnel are accustomed to “incurred but not reported” (IBNR) liabilities arising from injuries that occurred in the past but were slow to result in claims. These are often called “long-tail” liabilities or claims and can be addressed in the same manner as more immediate “short-tail” claims. That is to say, an insurer can resolve long-tail claims as they actually appear in the tort system over time through litigation and/or settlement, which is something of a traditional insurer response. The elongated time horizon of long-tail liabilities, however, offers other opportunities to resolve, contain, or diminish costs via alternative efforts undertaken before the claims actually come into being and are filed in the tort system. Such advance efforts to contain liabilities is referred to as “ring-fencing.”