A ₹11,000 Crore Single Risk in a Cyclone Zone
Deccan Steel's coastal plant is up for renewal: property damage sum insured ₹9,000 crore, plus business interruption on a declared gross profit basis of ₹40 crore per week over a 52-week indemnity period. The group already carries 12 similar industrial risks in the same cyclone zone. Its property catastrophe treaty is ₹1,200 crore xs ₹300 crore for the whole account with one full reinstatement; the per-risk programme is ₹400 crore xs ₹50 crore. The facultative market can offer ₹500 crore xs ₹300 crore at a 0.35% rate on line, but only with a 24-hour clause, a 72-hour event definition, and a condition that all engineering survey recommendations are closed. The October survey still lists three open items, including a deficient fire-water ring main and unprotected cable trays in the control room. The client refuses any coinsurance clause and wants a 10% rate reduction.
1. Can this risk be written? Set out the exposure, the available capacity and your recommendation.
Read the worked answer
Start with the arithmetic. Property ₹9,000 crore plus BI of ₹40 crore × 52 weeks = ₹2,080 crore gives a single-event exposure of roughly ₹11,080 crore. Available capacity is the ₹50 crore net retention, the ₹400 crore per-risk layer and ₹500 crore facultative - about ₹950 crore. The remaining ₹10,100 crore has no home. On a gross basis this risk cannot be written at the requested terms, and no amount of pricing changes that.
Options:
- Coinsurance/vertical share. Take 10–15% and broker the balance to coinsurers, with the client retaining a meaningful share. The client's refusal of a coinsurance clause is a serious warning sign: without it, the insurer carries a risk far beyond its capital.
- Reduce the exposure. Lower the sum insured to a realistic maximum foreseeable loss, impose a substantial deductible, and sub-limit BI (for example a 26-week indemnity period with an aggregate cap).
- Reinsure the gap. Approach the facultative market for a larger line and test whether the 24-hour and 72-hour clauses are compatible with the cat treaty.
Recommendation: offer terms conditional on a coinsurance clause, closure of the three survey items and a BI sub-limit; decline otherwise, and record why. One event here would consume years of capital.
2. How would you structure the reinsurance and manage the group's accumulation in the zone?
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A ₹50 crore per-risk retention is sensible for attritional business but irrelevant when a single risk is ₹11,000 crore.
- Buy facultative capacity up to the limit available - ₹500 crore xs ₹300 crore - and confirm that the facultative and treaty wordings aggregate consistently.
- Verticalise rather than absorb. Retain 10–15% and place the rest with coinsurers, so that the group's own capital is exposed to a share it can survive.
- Test the catastrophe treaty against reality. The treaty is ₹1,200 crore xs ₹300 crore across 13 zone risks, each potentially ₹11,000 crore. A single cyclone making landfall near several plants exhausts the layer several times over. Model a 1-in-100 and a 1-in-200 cyclone with realistic correlation between the sites, and compare the group's retained loss with available capital.
- Check reinstatements. One full reinstatement may be consumed by the first event, leaving no cover for a second storm in the same season - precisely the scenario a coastal portfolio faces.
- Avoid double counting. The cat treaty is per event across all risks; the per-risk layer is per risk; the facultative is risk-specific.
Present the accumulation to the board as a scenario loss, not as a programme diagram, and state what the group retains after all covers are exhausted.
3. The client refuses coinsurance and wants a 10% rate cut. How do you handle the terms negotiation?
Read the worked answer
Separate the non-negotiables from the negotiable.
Non-negotiable:
- Closure of the three survey recommendations, verified by re-survey before inception. The fire-water ring main and unprotected cable trays are exactly the features that turn a controllable fire into a total loss; insuring without them is knowingly accepting a preventable catastrophe.
- A coinsurance clause with the client retaining at least 10–20%. Without it, moral hazard and concentration both increase, and the insurer's capital bears a risk it cannot diversify.
- A 72-hour event definition, a named-storm trigger and consistent hours clauses across treaty and facultative layers.
- BI discipline: waiting period of 30–60 days, sub-limited aggregate, and an indemnity period justified by a realistic rebuild time rather than the requested 52 weeks.
- Full written disclosure of the exposure, the cover purchased and the uninsured gap.
Negotiable: rate structure. Refuse the 10% reduction - an inadequate rate just buys a larger loss. Offer instead a profit-share or a no-claims arrangement, or a rate held flat with a lower BI sub-limit. If the client will not accept the conditions, decline and document the reasons and the terms that were available, so the decision is defensible later.