As an insurance professional, I get asked this question a lot. Loss Runs are simply a print-out or report/spreadsheet from an insurance carrier showing the loss history or claim history on a given account. The Loss Run will show the history of claims on an account, including:
- Name of the claimant
- Date of loss
- Date the matter was reported to the carrier
- Whether the matter is open or closed
- If the incident was simply reported as a potential claim, and nothing further came of it.
If the claim is closed, the Loss Run report will show what was paid out on the claim. The payments will include:
- Loss Adjustment Expenses (“LAE”); the amount spent defending the claim, which is usually made up of legal fees
- Indemnity payment; damages/settlement amount
- The total loss paid on the claim, which is a combination of these two amounts
If the claim remains open, the Loss Runs will show both the actual payout to date, which generally consists of loss adjustment expenses, as well as reserves for both future LAE and possible indemnity payment. Insurance companies are required to set aside reserve amounts on all open claims.
Reserve amounts are intended as reasonable estimates of the potential loss on the account, which theoretically ensures that the insurance company’s overall financial picture at any given point includes not only the premiums being received, but also the likelihood of future payouts for claims. After all, it can take months, or even years, for a claim to work its way through the courts. There are generally two reserve figures shown on a Loss Run:
- Loss Adjustment Expense Reserve
- Indemnity Reserve
During the life of a claim the reserve amounts can go up and they can come down. A claim that initially looks relatively minor might develop badly over time and the insurance company’s estimates may have to change. Naturally, the reverse can also be true. Insurance companies periodically review all open claims to be sure that their reserves are adequate.
While a claim is open, however, you add up all three numbers – actual costs incurred to date, estimated future expenses, and estimated potential indemnity payment. The total is the “underwriting loss”; the figure that an underwriter will use to evaluate an account, either for renewal purposes or as new business.
Some carriers will decline to release indemnity reserve numbers because they consider it to be proprietary information and confidential. Their concern is that if the indemnity reserve numbers fall into the wrong hands, i.e. the other side, it can be used as an indication of how severe they think the claim might be. This is creating some controversy in the industry right now because it does make it more difficult for an underwriter reviewing the account for the first time to adequately evaluate it. Some people in the industry believe that the real motivation behind withholding reserves is to make it that much more difficult for a competing carrier to underwrite the account and possibly write it. Ironically, some of the carriers that are very aggressive about withholding reserves are the most vocal when they are presented with Loss Runs from another carrier that do not have those reserves.
Loss Runs are an important part of the underwriting process but are not automatically provided. Occasionally, if carrier “A” is non-renewing an account they will automatically attach the Loss Run to the non-renewal notice. Basically what they are saying when they do this is: “We are not going to renew your insurance. Here’s your Loss Run, good luck and goodbye!” Sometimes if they are not renewing, they will just say “good luck, goodbye!” In this case it is up to the insured to request Loss Runs.
Now here’s where things can get a bit tricky . . . When a client asks their agent/broker for Loss Runs, the broker knows that there is only one reason that the request is being made; their client is speaking with another broker. In New York there is a specific regulatory requirement that Loss Runs be provided within a set time period from when they are requested. Even so, some brokers will try to discourage their client, or drag their feet, because they know that the longer they can delay the process the less likely they are to lose the account.
Some clients are uncomfortable making the request of their broker, so there are ways we can work with a prospective insured to obtain Loss Runs on their behalf. It generally requires a letter of authorization which we then submit either to the other broker or directly to the carrier. Sometimes the carrier will send the Loss Runs to us directly, but sometimes they will provide them only to the incumbent broker. At that point, we pick up the phone and politely – but firmly – ask that broker to forward the information either to us or to their client, who then forwards the information to us. Usually, it is a relatively painless process but from time to time a broker will try to play games.
Sometimes the Loss Runs will show that there have been no claims, which is fine. It will state exactly that, no claims. Even so, we need to show this to the underwriter, since it is like one attorney talking to another attorney, or a doctor talking to the other doctor; they want to hear it “from the horse’s mouth.”
So, what is a “Loss Run?” Hopefully you now know not only what a “Loss Run” is, but why they are often an important and necessary component of a complete underwriting file. Like all things, they can sometimes be challenging but, honestly, they really don’t need to be.
If you would like further information regarding Loss Runs or any professional liability insurance question, please feel free to contact EARHART LEIGH ASSOCIATES, INC., The professionals’ insurance professionals!®
Bruce R. Swicker
EARHART LEIGH ASSOCIATES, INC.
The professionals’ insurance professionals!®
500 Fifth Avenue, Suite 2210
New York, NY 10110
Toll Free: 877-B-SWICKER (877-279-4253)