Reinsurance tutorials #29
What is liability?
Liability insurance covers damages caused by or resulting from an action or the negligence of the insured. The insured can be a person during his private activity or professional activity, but it can also be a company. Liability insurance mainly deals with third parties and not contractual parties. The damages can be material damages or bodily injuries.
Long tail is one of the major characteristics of this line of business, and many years can go by between the cause and the damages or losses. The claim can be notified many years after as the bar time to claim is quite long in many countries. So, liability insurance is complex because the laws are different from one market to another; and even for the same market, there are a lot of specificities. Product liability is not triggered in the same way as employer’s liability or medical malpractice. And liability rules for a municipality are different from liability rules for a private house owner.
So as a consequence, the reinsurance treaty must be adapted to this long tail line of business: it must specify clearly the attachment point of the claim (loss occurring, risk attaching). Should also be taken into account the attachment policy of the claim according to the insurance policy: is it a claims made policy? Or is it a loss occurring policy? Moreover, the duration of the claim settlement (sometimes over 10 years) should also be considered. There are specific clauses to be included to the treaty in order to deal with change of law, event definition, index development, etc.
Liability is mainly reinsured through an excess of loss. But a quota share or a stop loss can also be purchased.
In France, Liability represents about 32% of Non-Life reinsurance premiums, which is to say 332 M€.
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