Claims payment pattern

A claims payment pattern describes the share of a cohort's final cost actually paid in each development year. It separates two worlds that share only the word insurance: a short tail line, such as glass breakage or motor own damage, disburses most of the cost within twelve months, while a long tail line, such as medical liability or construction, is still paying twenty years after the accident year. That difference drives almost everything else. It sets the duration of the liability and therefore the sensitivity of reserves to interest rates under a framework that discounts, it fixes how long the insurer carries an inflation risk it never priced, and it dictates the reinsurance structure, a long tail line calling for accident year rather than underwriting year covers. The problem solved is turning a commitment of uncertain amount into a cash schedule, without which neither discounting nor asset matching would be possible.

Under Solvency II, in force since January 1, 2016, the best estimate is discounted on the risk free curve published monthly by EIOPA, applied to the projected pattern. A line whose liability duration reaches seven years sees its reserves move by several percent for every hundred basis points of rates, while a line settled 90% within the first year barely moves at all.

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