Claims-Made Multiplier

A factor that is used to determine the premium of a claims-made policy. Claims-made multipliers are used to determine how much credit the insured receives over a specific period in a multi-year contract. Rates in claims-made policies are modified by factors that depend on the number of years that the policyholder has had the policy.

Insurance companies primarily use one of two methods for determining when coverage is triggered for one of their policies. An occurrence policy will have its coverage triggered on the date the loss event occurred, and does not provide coverage for events that took place before the policy came into effect. The insurer will be responsible for settling a claim even if the claim is made years after the loss event occurred. This type of policy is used in general commercial liability, auto, and homeowner’s policies.

The other coverage trigger option used by insurance companies is the claims-made policy. Coverage is triggered when the insured determines that a claim may arise, at which point the insured notifies the insurer. The policy will apply retroactively up to a specific point in time – the retroactive date – and will require the insurer to provide coverage even if the insured had not purchased the policy at the time. This type of policy is used to cover long-tail liabilities, such as professional liabilities, directors and officers' liabilities, and errors and omissions liabilities.

Insurers offering a claims-made policy face less risk during the first year the policy is in force. This is because the likelihood of an incident occurring and a claim being filed for that incident is low. As a result, the premium owed by the insured is lower the first year. The insurer uses the claims-made multiplier to adjust the premium each year that the policy is renewed, with the premium increasing each subsequent year. The premium increases because the insurer is exposed to a higher claims risk as the policy covers a longer period of time.