Death, Disability and Retirement Coverage: Pricing the "Free" Claims-Made Tail

Introduced primarily as a marketing tool, free tail coverage is becoming a standard feature of claims-made insurance policies and is increasingly being used for medical malpractice and other forms of professional liability exposures. In addition, as of December 3 I, 1993 the NAIC is requiring that reserves be established to recognize this exposure, further elevating the need for proper pricing and reserving. When free tail coverage is extended due to the death, disability, or retirement of the insured, it is commonly referred to as “DD&R” coverage. This paper presents three models for determining the cost of DD&R as a function of mature claims-made coverage. Level funding, or constant premium loads, are calculated that take into account mortality, disability, retirement, and lapse profiles of the insured population. We also examine model assumptions and the implications on unearned premium reserves attributable to the presented pricing models.