What are Latent Claims?
Latent Claims derive from the perils that were unforseen when the Insurer wrote the policy and is applied to claims that become known about some years after the casue of loss.
A latent claim is a claim that arises from a risk not anticipated by the underwriter and not priced for in the original policy. The first claim of this type will typically exhibit a significant delay in its reporting.
Examples of Latent Claims
A chemical defoliant that was sprayed by the US Army over Vietnam in the 1960s. The manufacturers of chemicals were sued by soldiers for consequent health problems and the claims were made in 1980s. However, the claim cannot be established.
No link has been proven however it might be linked to headaches, cancers or sleeping problems.
Serious problems like cancers can be caused using Benzene. Once, a chemical was found in some drinks.
Those who are exposed to polluted conditions, the impact on the health can be seen after many years.
Against gun manufacturers, there have been claims for compensation. Most of these have been unsuccessful.
It has happened many times that the injury or death has been caused by long term smoking and so the families have tried to resolve it in court.
Year 2000 computer system (Y2K bug)
Most interestingly, Until the 1990s, many computer programs (especially those written in the early days of computers) were designed to abbreviate four-digit years as two digits in order to save memory space. These computers could recognize “98” as “1998” but would be unable to recognize “00” as “2000,” perhaps interpreting it to mean 1900. Many feared that when the clocks struck midnight on January 1, 2000, many affected computers would be using an incorrect date and thus fail to operate properly unless the computers’ software was repaired or replaced before that date. Other computer programs that projected budgets or debts into the future could begin malfunctioning in 1999 when they made projections into 2000. In addition, some computer software did not take into account that the year 2000 was a leap year. And even before the dawn of 2000, it was feared that some computers might fail on September 9, 1999 (9/9/99), because early programmers often used a series of 9s to indicate the end of a program.
Top Down Approach for Latent Claims
Under the top down method, we aim to produce a global estimate of the liability to the economy or the insurance industry. We then estimate the proportion of this which will be attributable to the insurer, taking into account the insurer’s policy terms, excesses and limits.
Bottom Up Approach for Latent Claims
Under this method, Actuaries review the policies written by the insurance company to see which could be exposed to the latent claim type.
Actuaries estimate the liability for each insured in so far as each insured has potentially different scope for the production and aggregate cost of latent claims. We allocate to this the proportion of coverage provided by the insurer.
Actuaries make assumptions about the manner in which the claim will be allocated between the various years of coverage and the various insurance policies providing cover in each year.