Cashew Unit Risk Portfolio Review
Mr. Patra runs a small cashew processing unit near Balasore, Odisha. His assets are: factory building ₹40 lakh, plant and machinery ₹25 lakh, raw cashew stock that peaks at ₹18 lakh during March–June, and finished goods ₹6 lakh. Three years ago he bought a standard fire policy with sum insured ₹50 lakh covering building, plant and machinery and stock, and has renewed it every year. He has no cyclone or storm cover even though the unit is 12 km from the coast. He employs 22 workers, including 10 casual loaders; there is no employees’ compensation policy. Last year two casual workers were injured and he paid ₹40,000 from his own funds. In June a buyer cancelled an order, causing a ₹3 lakh loss. A bank loan of ₹30 lakh is outstanding. Mr. Patra says, 'I have fire insurance, so my business is protected.'
1. Identify three major loss exposures that are uninsured or inadequately insured, and classify each as pure or speculative and as a candidate for retention, transfer or avoidance.
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The three main gaps are: (i) cyclone/storm damage to building, plant and stock. This is a pure risk, low frequency but severe on the Odisha coast; it should be transferred by a standard fire and special perils policy covering storm, cyclone, flood and inundation. (ii) Injury to the 22 workers, especially the 10 casual loaders. This is a pure liability risk; it is presently retained and was actually financed from the owner’s cash (₹40,000). It should be transferred through an employees’ compensation policy or a group personal accident policy, with the legal liability limit checked. (iii) Stock and business interruption. Stock is underinsured because the peak is ₹18 lakh and finished goods ₹6 lakh, and a fire or cyclone can stop processing. Business interruption following an insured peril is insurable; order cancellation by a buyer is a speculative/commercial risk and is generally not insurable, so it should be managed by contracts and credit checks. The owner’s statement confuses having a fire policy with having a risk-management plan.
2. Evaluate whether the ₹50 lakh fire sum insured is adequate. Show calculations for property and stock and explain the consequences of underinsurance under the average clause.
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Add the property values: building ₹40 lakh + plant and machinery ₹25 lakh + peak raw stock ₹18 lakh + finished goods ₹6 lakh = ₹89 lakh. The fire sum insured is ₹50 lakh, i.e. only 56.2% of the value at peak. If the policy has an average (underinsurance) clause and the sum insured is treated as one aggregate, a loss of, say, ₹20 lakh would be settled as ₹20 lakh × 50/89 = ₹11.24 lakh, before deductible, so the owner bears ₹8.76 lakh. If stock is separately insured for a lower sum, the same proportionate reduction applies to the stock loss. The practical consequences are: the owner is a co-insurer for the gap; a large cyclone or fire loss could exhaust the sum insured and leave nothing for stock; and the fire policy alone does not pay for cyclone unless storm/cyclone is added. The ₹3 lakh order cancellation is not a fire loss at all and would not be paid.
3. Recommend a revised insurance portfolio with specific covers and conditions, and explain why it fits risk management principles.
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Recommended portfolio: (1) Standard fire and special perils policy with sum insured near reinstatement value - at least ₹89 lakh, preferably ₹95–100 lakh to allow for escalation; include storm, cyclone, flood, inundation, subsidence and landslide perils; insure stock separately with a peak-season declaration or a floater so that the March–June peak is not underinsured. (2) Employees’ compensation policy for all 22 workers, including casual loaders, with wages declared correctly; add group personal accident for medical expenses. (3) Public liability and, if the unit stores or uses hazardous goods, industrial all-risk. (4) Marine transit policy for raw cashew inbound and finished goods outbound. (5) Business interruption/insurance of profits for fire/cyclone, with an indemnity period of 6–12 months. (6) Small deductibles to retain frequent small losses, and avoidance of uninsurable speculative risks such as order cancellation. This follows the risk-management sequence: identify, measure, select transfer for low-frequency/high-severity pure risks, retain small predictable losses, and avoid or control speculative risks. The proposal must disclose all material facts to the insurer.