Occurrence Coverage

Study guide: Exam 5

Occurrence Coverage is a policy trigger under which the policy responds to losses that occur during the policy period, however long afterwards the claim is reported.

$\text{Covered if } \; \text{effective date} \le \text{accident date} \le \text{expiration date}$

The occurrence form gives the insured automatic "tail" protection: a loss occurring in the policy period is covered regardless of when the claim is reported, with no need for an extended reporting endorsement.
The insurer bears the mirror image of that promise. It must reserve for pure IBNR — claims it has no knowledge of — for as long as claims from expired policies can still emerge, which for a product like medical malpractice can be many years.
Occurrence business is aggregated on an Accident Year basis, because the accident date is the trigger: in Werner's report-year-by-lag table an occurrence policy is a diagonal.
Pricing an occurrence policy means projecting claims that may not be reported, let alone settled, for many years, where a claims-made price needs only the claims reported in the coming policy period — so the pricing risk is greater. And as long as claim costs are increasing, the occurrence policy costs more than the claims-made one (Principle 1 of claims-made policies).
Claims-made coverage was introduced as the alternative for professional liability, including medical malpractice, after high economic and social inflation and rising claim frequency in the 1960s and 1970s left long-tailed occurrence products significantly underpriced for years before insurers recognized it.

Occurrence and Claims-Made on the Same Loss A general liability policy runs $1/1/2024$ – $12/31/2024$ . A customer slips and falls on $8/10/2024$ but does not present a claim until $3/15/2026$ .

Does the policy respond under an occurrence form? Under a claims-made form?

Answer Occurrence form: covered. The accident date $8/10/2024$ falls inside the policy period, so the $2024$ policy responds. The $2026$ report date is irrelevant to coverage — though it means the insurer carried this claim in AY 2024 IBNR for nineteen months.

Claims-made form: not covered by the $2024$ policy. The trigger is the report date, which falls in $2026$ . The claim would attach to the policy in force on $3/15/2026$ provided the $8/10/2024$ accident date is on or after that policy's retroactive date. If the insured let coverage lapse at the end of $2024$ and bought no extended reporting period, the claim is uninsured.

Why the Occurrence Form Costs More A liability exposure has an expected loss cost of $\$1{,}000$ per year in $2024$ terms, with annual loss trend of $6\%$ . Claims report over four years: $40\%$ in the accident year, then $30\%$ , $20\%$ and $10\%$ .

An insurer prices a $2026$ policy year on both forms. Ignore expenses and discounting.
Answer Occurrence. The policy covers accidents in $2026$ , whose average accident date is mid- $2026$ — two years of trend from the mid- $2024$ base:

$\$1{,}000 \times 1.06^{2} = \$1{,}123.60$

Claims-made (mature). The policy covers claims reported in $2026$ , which arise from accidents in $2026$ , $2025$ , $2024$ and $2023$ in the proportions above. The average accident date is therefore earlier:

Weight each accident year's cost by its share of the claims reported in $2026$ :
 $\begin{align*} \text{Cost} &= \$1{,}000 \times \left[0.4(1.06^{2}) + 0.3(1.06^{1}) + 0.2(1.06^{0}) + 0.1(1.06^{-1})\right] \\ &= \$449.44 + \$318.00 + \$200.00 + \$94.34 \\ &= \$1{,}061.78 \end{align*}$ 
The mature claims-made policy is about $5.5\%$ cheaper ( $1{,}061.78 / 1{,}123.60 - 1$ ) — close to one year of trend, since the average reporting lag is $0.4(0) + 0.3(1) + 0.2(2) + 0.1(3) = 1.0$ year — because its claims come from older, cheaper accident years. (Putting the average lag in the exponent, $\$1{,}000 \times 1.06^{1.0} = \$1{,}060$ , slightly understates the cost.) In a first-year claims-made policy the gap is far larger, since only accidents on or after the retroactive date can attach — which is why claims-made rates step up year by year until the policy is mature.