How your "free" tail liability policy is funded

Area of Science:

• Medical professional liability insurance
• Actuarial science
• Risk management

Background:

• Claims-made professional liability policies often include Extended Reporting Endorsements.
• These endorsements, commonly known as "free tail" coverage, protect insured doctors against claims made after policy expiration due to death, disability, or retirement.
• This coverage is provided without an explicit additional premium charge.

Purpose of the Study:

• To elucidate the pricing mechanisms behind "free tail" policies in professional liability insurance.
• To explain how these seemingly free endorsements are pre-funded.
• To review the core concepts involved in actuarial assessments for such policies.

Main Methods:

• Analysis of premium loading structures in claims-made policies.
• Examination of demographic data utilization in actuarial pricing.
• Review of the financial pre-funding models for Extended Reporting Endorsements.

Main Results:

• "Free tail" coverage is not truly free but is pre-funded by a percentage loading on all insureds' premiums.
• The specific loading percentage is dynamically adjusted based on ongoing analysis of the insured population's demographics.
• This loading ensures the financial viability of providing post-separation coverage.

Conclusions:

• Professional liability insurers utilize a pre-funding model for "free tail" endorsements.
• Demographic analysis is crucial for accurately pricing these endorsements.
• Understanding this pricing structure is essential for insured doctors to comprehend their policy's true cost.