Ridgeway Frozen Foods: Coinsurance, PML and Reinsurance Capacity
Ridgeway Frozen Foods, a family-owned distributor, seeks renewal of its commercial property policy. Declared values are building $6.2m, plant and machinery $4.8m, and stock $2.1m. The policy carries an 80% coinsurance clause and a blanket limit of $12m. The risk has five claim-free years, but a survey flags a 30-year-old freezer block with combustible insulated panels and no sprinklers; fire brigade response is 18 minutes. The surveyor estimates a probable maximum loss (PML) of $7.9m for a single worst-case fire in that block. The insurer's net capacity per risk is $5m. Facultative reinsurance of $3m is available, but at a rate that would consume most of the renewal margin. The broker requests a 10% rate reduction and removal of the coinsurance clause, arguing the new ammonia refrigeration plant improves the risk. The underwriter must decide renewal terms before the expiry date in 10 days.
1. Calculate whether the blanket limit satisfies the 80% coinsurance requirement, and state the maximum indemnity payable for a $6m fire loss if the policy has a $25,000 deductible. Show your reasoning.
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Total declared value is $6.2m + $4.8m + $2.1m = $13.1m. The coinsurance requirement is 80% x $13.1m = $10.48m. Because the blanket limit of $12m exceeds $10.48m, the coinsurance clause does not reduce recovery, provided the declared values are accurate. A $6m loss is below the $12m blanket limit, so indemnity is $6m less the $25,000 deductible = $5.975m, subject to any sub-limits. The key judgement is valuation accuracy: if stock is understated because it is valued at cost rather than replacement cost, the 80% test could fail at the time of loss. The underwriter should therefore require a recent valuation and a stock declaration basis before agreeing to remove the coinsurance clause.
2. Recommend a limit, deductible and reinsurance structure, explaining how you would address the $7.9m PML against $5m net capacity.
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The PML of $7.9m exceeds net capacity by $2.9m. Options are to buy $3m facultative reinsurance, reduce the net line to $5m and place the excess facultatively, or impose a per-location sub-limit. I would retain the $12m blanket limit but add an $8m sub-limit for the freezer block until sprinklers are installed, and increase the deductible to $100,000 to reflect the concentration risk. Rate should not be reduced; a 10-15% increase is justified by the PML and the broker's request to remove coinsurance. Conditions should include a sprinkler installation timetable, hot-work permits, impairment procedures and a business interruption limit review. If facultative capacity is too expensive, write $5m net with a $5m co-insurance share placed elsewhere rather than accept the full PML on the net line.
3. List five questions you would ask about the ammonia plant, stock valuation and business interruption before binding.
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- Ammonia charge: how many kilograms are in the system, and does the plant fall under a major-accident prevention regime? 2. What emergency shutdown, detection and contractor-permit arrangements exist for the ammonia plant? 3. How is stock valued for insurance: cost, replacement cost or selling price, and does it include stock held off-site? 4. What is the peak stock value and when does it occur relative to seasonal demand? 5. What business interruption indemnity period is required, and is the limit based on gross profit, rent or debt service? These questions test whether the declared values and PML are credible, not just whether the plant is modern.