Petrochemical terminal: treaty capacity, PML and facultative shortfall
An insurer is offered a petrochemical storage terminal with a total insurable value of ₹960 crore, all in one compound with four interlinked tanks and a shared pipeline manifold. The insurer's net retention is ₹20 crore per risk. Its surplus treaty has 15 lines, giving automatic capacity, and the treaty excludes risks with a probable maximum loss above ₹150 crore unless specially accepted. The insurer applies a 30% quota share on this class before the surplus treaty. The insurer's PML model puts the terminal's probable maximum loss at ₹540 crore, driven by a vapour-cloud explosion affecting all four tanks. The broker wants a quote in five days for ₹960 crore. The facultative market is offering only ₹250 crore at 0.42%, with a 72-hour clause and a condition that the insured installs foam deluge and tank gauging within 12 months. The insurer's board limit for any single risk is ₹600 crore of sum insured.
1. Calculate the maximum amount the insurer can write on its automatic capacity and explain the treaty constraints.
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Automatic capacity is calculated on the retained line, not the gross sum insured. The 30% quota share cedes 30% of the risk, so the insurer's retention on a risk is 70% of ₹20 crore, or ₹14 crore. The 15-line surplus then gives 15 × ₹14 crore = ₹210 crore, so automatic capacity is ₹224 crore. That is the ceiling before facultative. But the treaty also excludes risks with PML above ₹150 crore unless specially accepted; the modelled PML is ₹540 crore, so even the ₹224 crore cannot be written without special acceptance. The board's ₹600 crore limit is an internal ceiling, not treaty capacity. Facultative adds ₹250 crore, taking total capacity to ₹474 crore, which is only 49.4% of ₹960 crore. So the full ₹960 crore cannot be written. The 72-hour clause and improvement conditions further limit the cover and must be reflected in the quote.
2. Recommend a structure to the broker and state the conditions you would attach.
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Recommend a 51% coinsurance: the insured retains 51% (₹489.6 crore) and the insurer writes 49% (₹470.4 crore), within the ₹474 crore available. Alternatively, quote a reduced sum insured of ₹470 crore with an average clause, but coinsurance is cleaner because it keeps the insured's own retention aligned with the PML. Conditions: foam deluge and tank gauging installed within 12 months, with interim controls and a survey at 90 days; the 72-hour clause and a per-occurrence limit of ₹470 crore, not full sum insured; special acceptance from the treaty reinsurers and facultative placement confirmed before binding; and PML revalidation after improvements, with a right to re-rate. I would also check accumulation with other risks in the same industrial estate and set an aggregate catastrophe limit. The quote must state that it is subject to facultative placement and that no cover exists until confirmation.
3. What would make you decline the risk altogether?
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I would decline if the insured refuses coinsurance and insists on full ₹960 crore; if the treaty reinsurers refuse special acceptance; if facultative capacity is withdrawn or priced above authority; if accumulation with other nearby risks breaches the catastrophe budget; or if the insured refuses the foam deluge and gauging programme, leaving PML at ₹540 crore. I would also decline if the survey shows shared pipeline manifolds that make a single event capable of affecting all four tanks and no feasible separation. Declining is better than writing a line that looks larger than it is or relying on unplaced facultative capacity. If only the improvements are the obstacle, I would offer a short-period binder with a warranty and a 30-day cancellation right.