Claims-Made and Reported Policies and Insurer Profitability in.pptVIP

Claims-Made and Reported Policies and Insurer Profitability in Medical Malpractice Patricia Born California State University at Northridge M. Martin Boyer HEC Montréal First-of-five Claims-Made and Reported Policies and Insurer Profitability in Medical Patricia Born, California State University at Northridge M. Martin Boyer, HEC Montréal Abstract. The liability crisis of the 1970s led to the introduction of a new type of insurance policy designed, according to Doherty (1991), to reduce the un-diversifiable uncertainty associated with writing long-tail liability lines. These new claims-made and reported policies gained favor in place of the traditional occurrence coverage in the early eighties not only in medical malpractice, but also in the general liability arena. Under occurrence coverage, a loss incurred in a given year is covered by the contract for that year, regardless of when the claim is reported. In contrast, a claims-made policy pays only the claims reported in the policy year. Our paper presents a structure, conduct, and performance analysis à la Joskow (1973) of the medical malpractice insurance industry by focusing on the differences between the two contracts. The main question we want to address is why there are two types of contracts that cover the same risk exposure in the medical malpractice insurance industry whereas in other lines of insurance, only one exists primarily. Bone and flesh of paper Structure, conduct, and performance analysis paper à la Joskow. Originality lies in the comparison, withing the medical malpractice insurance market, of two contracts that co-exist: Claims-made and reported (CMR) versus Occurrence based (OCC); Doherty (1991) says CMR contracts exist because insurers face an important undiversifiable risk, and CMR contracts allow to pass along to the policyholder this risk; Boyer and Gobert (2006) say it depends on the policyholder’s discount rate. Introduction of a new organisational structure, the risk reten