Textile mill fire proposal: underwriting terms, reinsurance placement and a client refusing sprinklers
Sundaram Textiles, a composite spinning and weaving unit near Coimbatore, seeks a Standard Fire and Special Perils policy for buildings ₹18 crore, plant and machinery ₹40 crore and stock of cotton and yarn ₹27 crore - a total sum insured of ₹85 crore. The risk has had two fires in four years: an electrical short circuit in the motor control centre in 2022 (₹6.5 lakh) and a godown fire in 2023 attributed to spontaneous combustion in stored yarn (₹22 lakh). The yarn godown has no sprinklers, the yard hydrant line has been out of service for eighteen months, and only a 12-metre open gap separates the godown from the spinning hall. The nearest fire station is 9 km away and the factory runs three shifts. The buyer wants the policy at a 30% discount to the expiring rate to match a competitor's quote and asks that the spontaneous combustion loss be treated as a one-off. The insurer's net retention is ₹10 crore per risk and its surplus treaty gives a further ₹35 crore per risk.
1. Recommend whether to accept the risk and on what terms, working through the rating factors rather than the client's request.
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Recommendation: accept, but not at the expiring rate and not on the client's terms.
Occupancy and hazard. Cotton and yarn are a high-hazard occupancy with two distinct ignition routes - electrical in the machinery and self-heating in stored fibre. The 2023 loss was spontaneous combustion, which is specifically covered under the special perils extension unless excluded, so the client's 'one-off' framing misreads the policy: it is a recurring hazard of the occupancy, not an accident.
Protection. No sprinklers in the godown, hydrants dead for eighteen months, 9 km from a fire station, three shifts running unattended at night. Protection is materially below what the occupancy demands, and the loss history is consistent with that.
Loss history. Two fires in four years, ₹28.5 lakh in total, both preventable. A 30% discount is indefensible; a loading plus risk-improvement warranties is the correct response.
Terms to impose. (1) Remove the discount and re-rate for hazard and protection deficiency. (2) Warranty: hydrant system restored and certified by a competent agency within 30 days; electrical thermographic survey annually with compliance report. (3) Spontaneous combustion cover restricted - either excluded for the godown or subject to a higher deductible and a maximum limit per event. (4) Deductible raised to a level above the 2022 loss, so small preventable fires stay with the insured. (5) Stock on declaration basis with monthly declarations, to control the sum insured. (6) Consider a 24-month risk-improvement programme with sprinklers as the end condition of renewal.
2. Show how the ₹85 crore sum insured is placed on the reinsurance tower, and what the underwriter should do if facultative support cannot be obtained.
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Capacity per risk. Net retention ₹10 crore + surplus treaty ₹35 crore = ₹45 crore of own capacity. On a proportional basis, a single risk can be written up to ₹45 crore without facultative support (assuming no quota share on this account; if a quota share applies, the cession reduces the net line and the gross capacity rises correspondingly).
Gap. ₹85 crore − ₹45 crore = ₹40 crore must be placed facultatively. That is 47% of the sum insured - a large facultative requirement for a textile risk with two fires in four years, and facultative markets price that history into the rate.
Course of action. Obtain facultative quotes before binding, not after. If the cover is unavailable, or only available at a price that destroys the economics, the underwriter should not simply retain the risk. Options in order: (a) reduce the line to ₹45 crore and arrange coinsurance with another insurer for the balance, with the client's consent; (b) restructure as a layered programme - the godown stock insured for a lower declared value with a first-loss limit, since total-loss exposure in the godown is unlikely to equal the full stock value; (c) decline if neither is acceptable.
The absolute rule. Never bind a sum insured that exceeds treaty capacity on the assumption that reinsurance will be found later - a loss in the gap falls entirely on the company's net account, and the surplus treaty will decline a risk that was never properly ceded.
3. The client refuses sprinklers on cost grounds and asks the insurer to 'cover the godown fully and take the risk'. Propose and justify an alternative structure.
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Reframe the issue. The client is not buying protection; he is asking the insurer to fund a known deficiency through premium. Declining outright is defensible but loses an ₹85 crore account. A structure that prices the deficiency back to the client is better for both sides.
Alternative structure.
- Segregate the exposure. Carve the yarn godown out of the main policy and insure it under a separate section with its own sum insured, its own deductible (say ₹20–25 lakh, above the 2023 loss) and a per-event limit representing a realistic maximum loss rather than the full stock value.
- Restrict the peril. Exclude spontaneous combustion for the godown, or sub-limit it to a modest amount. The peril that caused ₹22 lakh of loss is precisely the one the client is unwilling to mitigate.
- Substitute passive protection for active protection. Require a four-hour fire-rated separation wall, self-closing fire doors, no storage above a stated height, and a ban on loose cotton storage in the halls - cheaper than sprinklers, and effective against fire spread across the 12-metre gap.
- Buy down the exposure. If the insured will not invest, he must retain more risk himself: a higher deductible plus a co-insurance share of, say, 10% on godown claims.
Justification. Each element aligns the price with the retained hazard, keeps a large account on the books, and gives the underwriter a defensible file if a loss occurs. It also creates a natural renewal lever: the restrictions lift when sprinklers are installed, which is a better incentive than a discount the client has already come to expect.