1995 # 39 (Marker/Mohl)

[Gareth Keenan]

So this is a problem about Claims-Made vs. Occurrence policies. The description indicates that a company purchased an occurrence policy at the beginning of 1991 and then switched to a claims-made policy for 1992-1993. At the beginning of 1994, they reverted to an occurrence policy.

We are provide a grid, basically of the form from the Marker/Mohl paper with Lags from 0 to 4 going down the columns, and report years increasing left to right from 1991 across the top.

The second part of the question asks what the expected losses are for the 1993 claims-made policy.

There are four losses in the 1993 column

35,000
28,000
25,000
20,000

To solve this problem, you know you can ignore the 25,000 loss, because it is covered by the 1991 occurence policy.

The solution also ignores the 20,000 loss. Why do you not include, the 20K in your 1993 expected losses?

Cheers,

Gareth Keenan

[Vorian Atreides]

Could you post the problem since this is not available via the CAS website?

[CHACAL7781]

The first policy purchased is an occurrence policy beginning in 1991 (Covers only claims that occurred in 1991, therefore a diagonal coverage going down from left to right). The 20K under RY 1993 with lag 3 is from a claim that occurred in AY 1990.

The claims-made policy for 1992 is a first-year C-M policy.
The claims-made policy for 1993 is a 2nd-year C-M policy. Although it is not stated in the problem, I believe this how you should interpret C-M policies following an OCC policy.
(I could be wrong on this but, hey it works for me)

In this case C-M polcies will cover claims above the diagonal of the occurrence policy. I think KFikes works this problem in the video and uses different colors for each policy.

Hope this helps.

[Gareth Keenan]

Hi Vorian,

I'm not skilled enough with LaTex to include the Chart, but it may help if I describe better the losses.

All four of the losses are paid in the calendar year 1993.

35K are losses paid in 93, from occurrences in 93 and claims made in 93
28K are losses paid in 93, from occurrences in 92 and claims made in 93
25K are losses paid in 93, from occurrences in 91 and claims made in 93
20K are losses paid in 93, from occurrences in 90 and claims made in 93

Does that help at all? The problem is really long. 91 had an occurrence policy, 92 and 93 had claims made policies.

[Malcolm]

GK - CHACAL7781 has it right. The losses occurring in 1990 and 1991 would have been covered by occurrence policies. Recall that, according to Marker/Mohl, when an insured switches to claims-made, there is typically a "retroactive date" restricting coverage to "accidents occurring on or after that date." (p. 269).
In this problem, the assumption is that the claims-made coverage has a retroactive date of 1/1/92, so any occurrences prior to that date would not be covered under the claims-made policies. This excludes the 20K and 25K in losses listed.

[Gareth Keenan]

Hi Malcom, thanks for volunteering. What makes the problem difficult, is that it is not made explicit that there is a retroactive date. The problem simply does not state that is the case.

Perhaps the greater challenge is this. Should I infer the retroactive date is 1/1/92, when the problem states that the company first purchased per-occurence coverage on 1/1/91? I mean, I know they are uninsured before 91, but if you purchase a mature claims-made policy, isn't just a policy that's a get out of jail card for ALL previous claims. It's difficult to describe, but I think there could be fair case to call foul play on the CAS for this problem.

Thanks for confirming with CHACAL7781 and responding to my post.

Regards,

Gareth Keenan

[Vorian Atreides]

Why would an insurer open themselves to an open ended retro-active date? The readings also indicate that a first-year CM policy will typically have a retro date concurrent with the effective date of the policy. It could also be the case that the syllabus reading for this (much) earlier exam had more explicit info about retro dates for this case.

Since the prior policy was an occurrence policy right before the CM, it makes no sense to have a retro date before the first CM policy effective date--otherwise, you're opening a huge can of worms of which policy is to cover a lag 1 claim made during the first CM policy term. And nothing in the readings indicate a discontinuous "retro-term" for occurrences. So trying to go the route of an earlier retro date is likely to lose a good chunk of the available points.

As such, the lag 4 claim mentioned occurred before the occurrence policy was in effect, therefore, is not covered by any of the current policies in force (let alone the CM policies).

[KidCA]

Vorian is going to yell at me about syllabus things, so stop reading if you don't wanna know...

But... as M/M said, CM came about to cover claims that had never been covered before, at least not large claims. There are a few situations where first year CM doesn't have a retro date at the start of the year. The first would be when there is historical exposure and no past insurance. Like, "uh oh, we better get coverage, claims are popping up from the past 10 years when we were bare!".

The second situation is more complicated in that you maybe had an occurrence coverage only up to like $100k, but now that seem terribly inadequate. so you write a new claims made coverage that applies to historical excess layers over the historical occurrence layer limits, too.

Heuristic CAS problems keep it simple; if they say last year was occurrence, you assume it $0-unlimited coverage, and if you start a CM year, it's retroactive to the first of the year. Anything else is non-sensical and wouldn't work well with the pretty M/M lag charts.

[Gareth Keenan]

Hi KidCA,

I'll just have to make those assumptions on the exam, my beef was that it wasn't spelled out in the problem. I put that on the CAS for permitting an ambiguous question.

Gareth Keenan

[oblivious]

Ok so I get the right answer for part A and B. On part C, I get 132k, while the answer has 160k.

I have that it would be 35k + 32k+40k+25k=132k
While the solution has 35k+40k+28k+32k+25k=160k

Now wouldn't the 28k be covered under the 1993 Claims made policy? Does it somehow relate to how as stated above "he claims-made policy for 1993 is a 2nd-year C-M policy. Although it is not stated in the problem"?

Even with that the 28k is included when accounting for the 1993 CM policies.

Once again thank you for any help that you maybe able to provide, also thank you VA, and Booyah for your help in the previous problems.