Heavy-Lift Project Cargo: Accumulation, Capacity and Reinsurance
An underwriter receives a single cargo risk: one 780-tonne offshore wind nacelle plus blades, insured value USD 62m, to be carried on deck of a heavy-lift vessel from Aalborg to Taichung during August–September. The vessel will also carry two other project cargoes insured by the same underwriter: a 240-tonne transformer (USD 18m) and 14 modules (USD 31m), giving a total vessel accumulation of USD 111m. The underwriter's own net capacity is USD 12m per risk, with a 60% quota share treaty attaching at USD 5m and a facultative facility for a further USD 25m. The heavy-lift vessel's deck load is subject to a stowage warranty and a sea-fastening certificate. August is peak typhoon season in the western Pacific; the port of Taichung has a 6.5m draft limit and no heavy-lift crane on site. The assured wants cover for 120% of value and a waiver of the 'on-deck' exclusion. The proposed deductible is USD 250,000 each accident.
1. Assess the probable maximum loss and accumulation, and explain how you would structure capacity for the three cargoes.
Read the worked answer
The first step is to define the risk aggregation. The three cargoes are on the same vessel and could be lost in one casualty, such as a fire, grounding, foundering or a major stowage failure. The total accumulation is USD 111m. If the assured's cover is at 120% of value, the nacelle line becomes USD 74.4m, and the total vessel accumulation becomes USD 123.4m. The probable maximum loss is not necessarily 100% of every cargo, but for a heavy-lift deck cargo in typhoon waters a total loss of the vessel and deck cargo is credible, so the underwriter should model a near-100% PML for the accumulation.
The capacity is short. The underwriter's net capacity is USD 12m. The 60% quota share would cede 60% of the written line, but the treaty has a per-risk or per-vessel limit that must be checked. If the treaty can take 60% of USD 74.4m, that is USD 44.64m, leaving USD 29.76m for the net account and facultative market. The facultative facility is only USD 25m, leaving a shortfall of about USD 4.76m on the nacelle alone, before the other two cargoes. On a total vessel loss of USD 123.4m, the shortfall is much larger.
The underwriter should not simply write the line and hope. Options are: reduce the line on one or more of the cargoes; arrange co-insurance; increase the facultative facility or place a dedicated per-vessel facility; negotiate a lower insured value or a 110% basis; or decline the risk. The treaty's 'any one vessel' aggregation clause and the facultative 'per risk' definition must be checked. The deductible of USD 250,000 is modest relative to the values and should be reviewed.
2. Identify the key technical underwriting concerns and the conditions you would impose before binding.
Read the worked answer
The main concerns are the heavy-lift operation, the deck stowage and the weather route. The nacelle and blades are high-value, difficult to replace and sensitive to handling damage. The vessel's deck strength, sea-fastening design, grillage, ballast and stability during load-out and discharge must be reviewed. The blades are long and flexible and are exposed to wind loads. The Taichung draft limit of 6.5m and the absence of a heavy-lift crane on site create a discharge risk: the cargo may need a floating crane, a barge or a temporary crane, and the operation may be delayed into worse weather.
Conditions should include: a marine warranty surveyor's approval of the stowage plan and sea-fastening; load-out and discharge surveys; certified sea-fastening calculations; a weather-routing service and typhoon avoidance plan; a maximum wave-height or wind-speed parameter for the voyage; no transhipment without the insurer's prior consent; and a condition that the vessel's class and heavy-lift equipment are approved. The on-deck waiver should be specific: deck cargo is covered, including jettison and washing overboard, but only subject to the sea-fastening warranty and survey conditions.
The underwriter should also confirm that project delay, loss of use and consequential loss are excluded; that sue and labour and general average are covered; and that the deductible applies each accident or occurrence, with an aggregation clause for a series of accidents arising from one event. The 120% cover should be documented as a valued policy or increased-value cover, and the moral hazard explained.
3. How would the quota share and facultative facility respond to a partial loss of USD 9m, and what reinsurance issues arise?
Read the worked answer
Assume the written line is USD 74.4m (120% of USD 62m) and that the treaty and facultative facility are written on a pro-rata basis over that line. A USD 9m loss less the USD 250,000 deductible gives a claim payment of USD 8.75m. The deductible is borne by the assured, not shared by reinsurers unless the reinsurance says otherwise.
A pro-rata allocation would be: net account USD 12m / 74.4m = 16.13%, or about USD 1.41m; quota share USD 44.64m / 74.4m = 60%, or USD 5.25m; facultative USD 25m / 74.4m = 33.6%, or USD 2.94m. The total is USD 9.6m on a gross basis, but the paid claim is USD 8.75m, so each share is applied to the paid claim. On those figures the net account pays about USD 1.41m, the quota share about USD 5.25m and the facultative about USD 2.09m, subject to the exact placement percentages.
The reinsurance issues are aggregation, claims cooperation and follow-the-settlements. If the treaty has a per-vessel limit, the loss on the nacelle plus the other two cargoes could exhaust it. The facultative certificate may have a 'per risk' definition that treats the three cargoes as one risk because they are on the same vessel. The syndicate must notify the facultative reinsurer promptly and comply with the claims cooperation clause. The facultative reinsurer is bound by a good-faith, businesslike settlement within the terms of the reinsurance, but not by an ex gratia payment. The underwriter should also check whether the 120% basis is covered by the reinsurance or only the 100% value.