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Abstract

This paper examines how excess verdicts affect the insurance industry and studies insurance contract design from the policyholder’s perspective, focusing on cases where court awards exceed policy limits. Excess verdicts refer to court decisions that grant compensation higher than the maximum coverage stated in an insurance policy. They are increasingly common in severe liability cases such as wrongful death claims and create both financial and legal risks for insurers and policyholders. These risks lead to uncertainty in premiums, solvency management, and overall risk control within the insurance market. To address these issues, we develop a mathematical framework that models excess verdicts by separating loss levels, legal outcomes, and contractual terms that specify coverage beyond standard policy limits. The framework applies Valueat-Risk (VaR) and Conditional Value-at-Risk (CVaR) within a premium principle to capture the trade-off between risk exposure and cost in a manageable form. This approach provides a structured way to study how insurers and policyholders can share risks more efficiently when facing large and unpredictable legal awards. The results show that insurance contracts with multiple layers of indemnity can improve financial stability and fairness by distributing losses across different levels of coverage. Layered contracts reduce legal disputes, support balanced cost-sharing between insurers and policyholders, and give both sides clearer expectations about loss coverage. In practice, this structure helps insurers maintain solvency under extreme outcomes while offering policyholders more certainty about compensation in severe claim situations. The study provides a quantitative basis for designing more stable and transparent insurance products that can handle the growing problem of excess verdicts in modern
markets.

Publication Type:	Article
Additional Information:	This is an Accepted Manuscript of an article to be published by Taylor & Francis in North American Actuarial Journal, to be available at: www.tandfonline.com/journals/UAAJ
Subjects:	H Social Sciences > HF Commerce
Departments:	Bayes Business School Bayes Business School > Faculty of Actuarial Science & Insurance
SWORD Depositor:	Symplectic Administrator

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