Statutory Accounting for Tail Premium in Professional Liability Coverage
Get the tail before you sail! An extended reporting period insurance contract, also known as tail coverage, is an endorsement to claims-made policies. Because the claims-made policies only cover events that are reported during the policy’s effective period, once the policy ends, the insured is no longer covered for claims reported even if the loss occurred during the policy’s effective dates. If not automatically provided under the existing claims-made policy or mandated by the state regulation, it is important for the insured to consider purchasing the tail policy to maintain coverage for the policy period.
Accounting
SSAP No. 65, paragraphs 4 through 9 provide guidance on accounting for claims-made policies and associated extended reporting.
- Tail coverage at charge for a fixed period
For extended reporting endorsements issued for a defined period (e.g., six months, one year, five years), the tail premium is to be earned over the defined period with the respective unearned premium reserve recorded as a liability. The loss and loss adjustment expenses are to be recorded when reported.
- Tail coverage at charge for an indefinite period
For extended reporting endorsements issued for an indefinite period, the premium is to be fully earned immediately. To honor the matching principle, the loss and loss adjustment expense reserve on the claims not reported should also be recognized immediately.
- Tail coverage at no charge
If the insured is to cease their operations due to the reasons of death, disability or retirement (DD&R), in some cases, the claims-made policy provides for unlimited extended reporting endorsement coverage. This is often called a “free tail.”
Understanding that the insurance company projects the cost of the “free” tail in the current premiums charged on the original claims-made policy—meaning it’s not as free as the insured might believe—helps clarify the proper accounting. To ensure the insurance company does not earn the built-in tail portion of the premiums prematurely, it must record the “extended reporting endorsement policy reserve,” or DD&R reserve, as part of the unearned premium reserve. Actuaries typically compute this DD&R reserve.
Conclusion
Because of its specific nature, accounting for tail coverage requires some additional thought. Understanding the different types of tails makes determining the proper accounting treatment much easier. JLK Rosenberger, LLP can help clarify accounting for tail coverage as well as other insurance contract endorsements.
