Two insurers both write $10 million of premium, but one settles almost every claim within a year and the other waits a decade to learn its true losses. The line's characteristics, not its size, decide how hard the reserve is to estimate.
The tail of a line is the time from when a loss occurs until it is reported and fully paid. A short-tail line pays out quickly. A long-tail line pays out over many years.
Property and auto physical damage are short-tail. A car is dented, the claim is reported within days, and the check clears within months. Development is nearly complete by the first evaluation.
Workers compensation, medical malpractice, and general liability are long-tail. An injury may not surface for years, litigation drags, and lifetime medical benefits pay for decades.
KEY: Long tail means more of the ultimate loss sits in reserves rather than paid losses at any evaluation date. That reserve is what you must estimate, so long tail equals harder reserving.
Common mistakes
- Equating low frequency with low liability. A line with only 40 claims at $200,000 each holds $8,000,000 of loss; low frequency means volatile, not small.
- Assuming short-tail lines need heavy tail factors. Auto physical damage is 99% paid by 36 months; forcing a large tail factor overstates the reserve.
- Treating claims-made like occurrence for IBNR. A mature claims-made policy has near-zero pure IBNR; loading full occurrence-style IBNR double counts. The reserve is IBNER.
Bottom line
- Tail length is how long it takes claims to be reported and fully paid; long tail means more IBNR and more estimation risk.
- Long-tail lines (workers comp, medical malpractice, general liability) develop for years; short-tail lines (property, auto physical damage) settle fast.
- Frequency is claim count per exposure; severity is dollars per claim. High frequency, low severity gives stable, credible data; low frequency, high severity gives volatile data.
- Occurrence coverage responds to losses that occur during the policy period, regardless of when reported; claims-made responds to claims reported during the policy period.
Exam shortcut
When a question names a line, tag it fast: property and auto physical damage are short-tail, high-frequency; workers comp, malpractice, and liability are long-tail, low-frequency. The tag predicts reserve difficulty. If coverage is claims-made, expect near-zero pure IBNR and focus the reserve on IBNER; if occurrence, load substantial IBNR for the long reporting tail.
The full lesson (about 1,812 words, 12 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B4
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