Professional indemnity, claims-made policies i. Explain the difference between a claims-made basis policy and an occurrencebasis policy in direct insurance.

X is a law firm that buys professional indemnity. Assume that of the claims originating from advice given in year y,

• 25% of the claims are notified to the insurer in year y

• 35% in year y + 1

• 40% in year y + 2 The claims reported in each year are shown below (note that both the exposure and the claims reported have already been revalued).

Year Exposure (Turnover, Revalued), $M Claims Reported (Already Revalued), $M

<2008 110 2008 110 1.80 2009 100 1.72 2010 80 1.66 2011 50 1.07 2012 50 1.13 2013 (est) 30 ii. Explain what adjustments need to be made to exposure before being used for a burning cost exercise, and why.

iii. Assuming that:

• X buys PI insurance from the ground up

• the claims in the table above are from the ground up

• the retroactive date is 2005 estimate the expected losses for year 2013 based on a simple burning cost analysis.
iv. Explain what other assumptions you needed to make in (iii) besides those already stated in the text.
v. X is considering whether to move to an occurrence basis in 2013 as an alternative to renewing its claims-made policy. Explain what the main problem in doing this is going to be, and describe a possible solution for that problem.