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Accumulation Headache? Look to Carve-Outs for Relief

June 23, 2016| By Seong Wook Kim | Property | English

Unexpected capacity accumulation arising out of multiple primary policies can create big headaches for insurers, often prompting them to walk away from an otherwise desirable risk. However, there is a way to help insurers grow their books while keeping those exposures in check.

Two examples show how this can be achieved through utilizing non-proportional facultative reinsurance to carve out the excessive capacity accumulation.

In the first example, a large logistics center for a textile manufacturing company is owned by another company. The insurer issues two policies – one for the building’s owner with a total sum insured (TSI) of USD 120 million and the other for the content’s owner with a TSI of USD 180 million. Thus, the insurer has a large capacity accumulation on a heavy fire exposure risk. In this case, it is difficult to avoid the unwanted capacity accumulation, because both the logistics center and contents are part of large schedules of the two different companies and the insurer covers both.

Using non-proportional facultative reinsurance, the insurer can cede a portion of the building or the contents cover in order to reduce its capacity. For instance, if the logistics center has a warehouse with inferior construction or without sprinkler protection, the warehouse can be carved out easily in excess of the insurer’s desired retention while the insurer retains more on better-protected warehouses. Or if there are a lot of hanging garments at one of the warehouses, impairing the effectiveness of the sprinkler system, both the building and contents can be carved out in the same way.

The second example involves a large mobile phone manufacturing company and one of its main mobile phone chip suppliers. The mobile phone chip supplier is storing mobile phone chips with a monthly average value of higher than USD 100 million in the mobile phone manufacturer’s plant.

The insurer feels comfortable in retaining the warehouse because it is protected by an automatic sprinkler system covering about two-thirds of the area. However, mobile phone chips are a less desirable risk for the insurer because they are highly prone to water and smoke damage – and its monthly maximum value could go up to USD 160 million. Thus, the insurer decides to cede away the contents only on a non-proportional facultative basis in excess of a more reduced retention than normal.

By utilizing non-proportional facultative reinsurance, insurers can retain more premium on a relatively more desirable risk and still reduce their capacity on a high hazard risk. No reinsurance can convert a high hazard risk to a less hazardous one, but a smart use of non-proportional facultative can help you grow your book and keep your exposure in check.

For more information on using non-proportional facultative strategically and tactically, this video by Oscar Edelsvärd, Property Facultative Branch Manager in Copenhagen, is very helpful.


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