Retroactive Insurance Explained

Wondering what is retroactive insurance in Canada? And how it works? Read on…

Retroactive insurance is purchased to cover a loss after it has occurred. For example, retroactive insurance may cover incurred but not reported (IBNR) claims for companies that were once self-insured. When underwriting a retroactive insurance policy an estimate of the liability for claim-generating events that have taken place but have not yet been reported to the insurer or self-insurer is determined. The sum of IBNR losses plus incurred losses provides an estimate of the total eventual liabilities for losses during a given period.

Using this information, actuarial teams work with underwriting departments to determine an appropriate premium for the retroactive insurance policy. Retroactive insurance is similar to backdated liability insurance and loss mitigation underwriting both are also explained below. 

Backdated liability insurance explained

Another related form of coverage is what’s known as backdated liability insurance. Within the industry, this is defined as coverage procured for claims after a loss event has actually happened. This type of coverage is offered when the amount of the claim is very uncertain and potentially long delays in payment may result.

The premium charged by the insurer, coupled with its investment value, is calculated to be sufficient to cover all the claims from the incident. It is notable that backdated liability insurance is not a commonly available type of coverage.

What is loss mitigation underwriting?

Meanwhile, loss mitigation underwriting is the process of providing insurance coverage for existing litigation or for litigation that is imminent. It is interesting to note that loss mitigation underwriting originated in the early 1980s when, after a massive fire suffered by the MGM Grand Hotel in Las Vegas, policy limits were insufficient to cover the huge losses sustained.

In response, insurers offered a form of insurance designed to cover losses that had already occurred but whose magnitude had yet to be determined. In most instances, loss mitigation underwriting provides policies containing fixed limits of liability. However, in some situations, insurers offer loss mitigation underwriting (aka LMU) coverage arrangements in which the insurer’s liability is unlimited.

Kindly also note that backdated liability insurance and loss mitigation underwriting is not common in the Canadian marketplace. However, there are a few insurance companies that will consider these forms of coverage on a case-by-case basis.  

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