Research Handbooks in Financial Law series
Edited by Julian Burling and Kevin Lazarus
Chapter 8: Closing Books of Business: The Challenge of Fairness and Finality
David Whear and Bob Haken
JOBNAME: Lazarus PAGE: 1 SESS: 3 OUTPUT: Wed Dec 21 15:05:32 2011 8 Closing books of business: the challenge of fairness and ﬁnality David Whear and Bob Haken 1. BACKGROUND AND INTRODUCTION An insurance or reinsurance policy can give rise to liabilities which extend many years beyond the year in which the policy was written, so-called ‘long-tail’ liabilities. Insurers are required to make technical provisions against such liabilities and to hold regulatory capital to support them. This applies equally to insurers who continue to accept insurance business and those who have ceased to accept business and may be said to be in ‘run-off’, although the practical sanctions available to regulators for insurers in run-off who fail to meet prudential regulatory requirements tend to be somewhat weaker than those available against active insurers. Long-tail liabilities have, in particular, arisen out of occurrence-based liability policies, where the policy responds to claims relating to risks covered by the policy as long as the insured peril or event occurred during the policy period; such claims (for example in relation to asbestos, pollution, health hazard and product liability)1 frequently arise and are asserted years or decades after the claimant’s latent exposure to the product, substance or other peril.2 Long-tail liabilities are not, however, conﬁned to occurrence-based policies. For example, a decade on, laddering claims asserted under Directors’ and Ofﬁcers’ policies in the wake of the dot-com boom are not all settled and insurers still hold reserves against those claims.3 Product...
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