Chapter 7: Latent Claims

Question 1

What is a latent claim?

Answer 1

Claims arising from risks not allowed for when selling/pricing the original policy

Question 2

What is the latency period of a claim?

Answer 2

Mean time between exposure and manifestation

Question 3

What is the main feature of a latent claim?

Answer 3

The long period between the exposure and injury/claim

Question 4

Areas in which latent claims can arise in?
[3]

Answer 4

• Bodily injury
• Pharmaceutical drugs
• Physical damage

Question 5

Considerations when identifying potential latent risks?
[5]

Answer 5

• Historical latent claim risk in line of business
• Claim basis
• Territory
• Industry
• Exclusions in policy

Question 6

What are the stages of latent claims?
[4]

Answer 6

• Unknown
• Potential
• Emerging
• Emerged / Closed

Question 7

Describe the unknown stage for latent claims

Answer 7

The policy/risk has been accepted but the identity of latent claims are not yet known

Question 8

Describe the potential stage for latent claims

Answer 8

Information about possible identity of a claim type emerges but no clear link or liability has been proven

Question 9

Describe the emerging stage for latent claims

Answer 9

Claim type has emerged as latent claim but the full extent of the liability is still unknown

Question 10

Describe the emerged/closed stage for latent claims

Answer 10

Latent claim has occurred and is fully developed, or the latent claim is still emerging but in a predictable manner that can be underwritten for

Question 11

What are the uncertainties and disputes that can arise in the latent claim process?
[8]

Answer 11

• Reporting and settlement delays
• Possibility of litigation against multiple parties in very different jurisdictions
• Whether or not the insurer has a duty to defend the insured
• Whether legal expenses are covered, and to what extent
• How deductibles and limits apply, and the effects of claim allocation between years of
  coverage
• The type of claim (e.g. product-related)
• How reinsurance is applied
• The data available for analysis

Question 12

Claims development experience at unknown stage

Answer 12

• Existence of latent claim is unknown
• Considerable uncertainty in expectation so a simple method will be used
• Can use original pricing basis and modify downwards as time passes (will move to emerging stage if claims arise)

Question 13

Claims development experience at potential stage

Answer 13

• May be able to infer liability estimates based on size of historical latent claims and information relating to claim type
• Insurer’s may have legal defenses at this stage & probability of winning legal arguments should be considered

Question 14

Claims development experience at emerging/emerged stage

Answer 14

• Legal liability will be better established and more info available about potential extent of claims
• Can use a top-down or bottom-up approach to estimate the quantum of liability

Question 15

Describe the steps in the top-down approach to estimate latent claim liability

Answer 15

• Produce a global estimate of the liability to the economy/insurance industry
• Estimate the proportion applicable to the insurer & apply to global estimate
• Modify estimate bearing in mind the insurer’s policy terms, excesses and limits

Question 16

Describe the steps in the bottom-up approach to estimate latent claim liability

Answer 16

• Review the policies written by the insurer to assess which are exposed to latent claim types (keep in mind T&Cs)
• Estimate the liability for each insured & allocate proportion of cover by insurer
• Proportion of cover refers to the cases in which claims may be due to exposure lasting several years and multiple insurers. The allocation will be used to split claims evenly over the period and parties

The credibility of the estimate determined may be impaired by:
- changes to legal environment and propensity to claim
- incomplete policy records
- increased longevity of the insured

Question 17

What is the main method for calculating latent claim IBNR reserves?

Answer 17

Applying loadings to reported claims to date

The alternative is average cost per claim. Medical data can be used to project number of claims and claims cost will consider age, earnings, marital status and number of dependents.

Question 18

What factors determine the loading used for latent claims IBNR?
[10]

Answer 18

• what loadings competitors use
• the loadings used for similar accounts
• what the loading is being applied to (e.g. reported claims or paid claims)
• backlogs of unsettled claims and the speed of processing
• how the reinsurance process works
• the maturity of the cohort
• whether the business is direct, reinsurance or retrocession
• whether there are aggregate limits close to exhaustion
• the composition of the portfolio (e.g. large industrial companies)
• whether insurers have a habit of commuting policies

Question 19

What is ODMWA?

Answer 19

Occupational Diseases in Mines and Works Act (ODMWA) only covers occupational health dispensation specifically for mine and risk works related diseases. These include cardio-respiratory diseases.

Question 20

What is COIDA?

Answer 20

Compensation for Occupational Injuries and Diseases Act covers all employees and provides for the medical examination, certification and compensation of all employees who are injured on duty or who suffer from an occupational disease.

This will exclude disease-related claims for mineworkers (ODMWA), but accidents will be counted under COIDA.