What's in a period?

In insurance policies, we often come across time periods - waiting period, moratorium period, close proximity period, retroactive period, discovery period, reporting periods and so on, besides the policy period itself.?

All these periods have a significance and through this post, I intend to do a bit of a deep dive.

Essentially, the periods are of two types -?

??Negative discovery periods (NDP)

??Positive discovery periods (PDP)?

Waiting period, moratorium period and close proximity period all have one thing in common which is that they serve a negative discovery purpose. This means a claim or an event MUST NOT happen within that period.?

If a claim happens within a close proximity period, it means it needs to be investigated as it is suspicious. So this period connotes a negative discovery.?

Similarly, the waiting period and moratorium period are NDP’s. If a claim occurs within these, it denotes adverse selection or selection against the insurer which he wants to avoid.?

Reduced NDP’s are associated with increased anti selection and consequently higher moral hazard for the underwriter. However, too long an NDP, means the quality of cover or the benefit gets eroded to the detriment of the customer.?

So there is a "Goldilocks NDP" which is not too long and not too short, but just right.?

Now, coming to PDP’s, these are the opposite of NDP’s, in the sense that a claim or an event MUST occur in the period. The periods help extend the catchment area of the claim or incidence or occurrence.?

An extended reporting period helps the insured to report claims even after policy has expired. Run off covers help in similar fashion to keep coverage active for an extended period.?

The rationale is to help relieve pressure on the insured to investigate and immediately report any claim which would normally take time.?

Sometimes the policy periods itself become PDP’s to aid in claiming. Inherent Defects Insurance, Project Professional Indemnity, Public Offering of Securities Insurance and Title Insurance may be issued for periods of 10 years and sometimes more, since claims discovery takes time in these policies.?

A construction defect takes time to manifest itself. So does a defect in title. So the policies are not meant to be issued for too short a period that the insured is robbed of the opportunity to report a valid claim. There is latency involved and this must be, or is expected to be priced in, while they are underwritten.

Extended coverage for retired directors under a Directors and Officers Liability insurance serves as a PDP. This has now become lifetime coverage, though there is little chance of any such claim happening beyond 10 years due to law of limitation kicking in.?

However, as a matter of underwriting prudence PDP’s cannot be too long as that can lead to laxity of the insured, reduced due diligence to claims and thereby unwanted risk exposure. So the Goldilocks Principle applies to PDP’s too.?

A period is a period is a period.

Period. ??