Flood aggregate versus a hungry broker
A Lloyd's syndicate's property underwriter has a personal line authority of £3m and a class aggregate for UK flood of £25m for the underwriting year. It is 5 December and £22.8m of the flood aggregate is already committed. A broker presents a £2.75m share of a £55m commercial property schedule covering 14 food-distribution warehouses. The risk is 60% in Environment Agency flood zone 3, and the syndicate's catastrophe model shows a 1-in-200-year gross loss of £48m for the whole schedule, of which the syndicate's 5% line would bear £2.4m. The technical rate is 0.42% of total insured value, but the broker has authority to 0.31% and says the incumbent is at 0.29%. The treaty reinsurance has a £5m per-risk retention and a 1-in-200 event limit. The underwriter's manager is on leave until 9 January. The broker needs an answer by 6 December because the insured's cover expires on 7 December.
1. Can the underwriter accept the risk at 0.31% within their authority? Identify the binding constraint and show the calculation.
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No, the binding constraint is the flood aggregate, not the line authority or the rate.
- Line authority: the proposed line is £2.75m against a £3m personal authority, so the line size itself is within authority.
- Aggregate: the class aggregate is £25m and £22.8m is committed, leaving £2.2m. The risk's 1-in-200 contribution is 5% × £48m = £2.4m. Writing the line would take the aggregate to £25.2m, £0.2m over the limit. The aggregate is a hard underwriting limit, not a target; the underwriter cannot bind and then hope to fix it later.
- Treaty: the £5m per-risk retention means the syndicate's £2.75m line sits net of treaty for a single risk, so the aggregate breach is a net capital issue, not one ceded away.
The correct answer to the broker is a decline within authority, or a referral to the manager or deputy for an aggregate extension before binding. The rate question does not arise unless capacity is available.
2. If aggregate capacity were available, how should the underwriter approach the gap between the technical rate and the offered rate? Include the premium difference and the referral needed.
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If capacity were available, the rate gap still needs a decision. Technical premium at 0.42% on £2.75m is £11,550. The offered 0.31% produces £8,525, a shortfall of £3,025, or about 26% below technical. The broker's 'authority' to 0.31% is the broker's negotiating limit, not the underwriter's authority to write below technical rate.
The underwriter should:
- check whether the technical rate includes expenses, cost of capital and an appropriate cat load; if it does not, the gap is larger;
- consider whether the account justifies a reduced line rather than a reduced rate - for example, write £1.5m at 0.42%, which keeps the rate intact and reduces the cat aggregate contribution;
- offer a higher deductible or a flood sub-limit to bring the price down without giving away rate;
- refer to the pricing authority for any write below technical rate, with the reasons and the competing quote documented.
Writing at 0.31% simply because the incumbent is at 0.29% is not underwriting; it is matching a price without evidence that the price is adequate.
3. What should the underwriter communicate to the broker by 6 December, and why is silence not an option?
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By 6 December the underwriter must give a clear, written response: either a decline, a firm bind on acceptable terms, or a conditional indication that states exactly what is outstanding. Silence is dangerous because the broker may treat the absence of a decline as an indication and tell the insured cover is in place. The insured's programme expires on 7 December, so the client needs certainty.
The message should state the reason at a level the broker can use with the client: flood aggregate capacity is exhausted for the year, and the rate is below technical. It should not disclose confidential syndicate aggregate figures beyond what is necessary.
Because the manager is away, the underwriter should escalate to the deputy or chief underwriting officer under the syndicate's referral procedure. A limit breach cannot wait until 9 January. The underwriter should also record the decision, the calculations and the referral in the underwriting file; if the broker later claims cover was indicated, the file is the evidence.