Cedarline Retail Holdings - CAT Loss, Coinsurance Penalty, and a Blanket Limit Request
Cedarline Retail Holdings submits 11 strip centers with total insured value of $148M, written on a $50M blanket limit, 80% coinsurance, and a $25,000 deductible. Current annual premium is $412,000. Five-year earned premium is $2.06M and incurred losses are $6.83M, of which $6.40M is a single 2021 hail loss at Brighton Commons (TIV $22.6M, roof an original 1997 TPO membrane). Three centers sit in the same hail county, with combined TIV of $54M. Excluding the hail claim, the account shows $432,000 of incurred losses.
The submission is labeled 'clean five-year, 21% loss ratio' because the hail claim was excluded as 'a CAT event outside the insured's control.' The insured wants a 10% rate decrease and an increase of the blanket limit to $60M, which the broker says will cover Brighton's full rebuild cost of $27M including code upgrade. No roof inspection has been provided, and the appraisal supporting the $148M TIV is dated 2019.
1. Rebuild the loss ratio three ways - all-in, excluding the CAT loss, and CAT-loaded - and state which number belongs in the pricing model.
Read the worked answer
Three numbers, three different meanings.
- All-in: $6.83M ÷ $2.06M = 332%. This describes the account's actual cash experience but is driven by one event and has no credibility as a rate indication.
- Ex-CAT: $432,000 ÷ $2.06M = 21%. Arithmetically correct and analytically useless on its own - it says the account is a good fire risk in a county where hail is a real peril.
- CAT-loaded expected loss: with no model, a crude amortization is the hail loss at an assumed 1-in-10 annual probability: $6.40M × 0.10 = $640,000 per year. Add non-CAT expected loss of $432,000 ÷ 5 = $86,400. Total $726,400. Add 12% LAE → $813,600. Divide by (1 − 0.30 expense − 0.05 profit) = 0.65 → $1.25M indicated premium, about three times current.
What belongs in the model: the non-CAT loss ratio (21%), trended and loaded for the liability side, plus a vendor-modeled CAT average annual loss at 100- and 250-year return periods. The single $6.4M loss is a data point, not a rate; the model replaces my amortization. The 332% is not a rate either - it is a warning about volatility.
One more check the broker will not like: the 2021 hail payment was itself reduced by the coinsurance penalty, so the loss run understates the true severity of that event. If the insured had carried adequate limits, the incurred would have been closer to $15M.
2. Assess the blanket limit and coinsurance position, and respond to the request for $60M.
Read the worked answer
The coinsurance math. Required limit = 80% × $148M = $118.4M. Carried = $50M. Recovery factor = 50 ÷ 118.4 = 42.2% of every loss. Raising the limit to $60M improves that to 50.7%.
So $60M does not 'cover Brighton's rebuild.' It converts a 58% self-funded share of every loss into a 49% share. On a $27M Brighton loss the insured would still absorb roughly $13M - while paying more premium for the privilege.
Aggregation. Hail-county TIV of $54M already exceeds the $50M blanket. One event at those three centers could exhaust the limit before the other eight locations are considered, leaving the insured with no capacity and the company with an uncomfortable explanation.
Counter-proposal:
- Schedule the three hail-county centers at 100% of appraised value with per-location limits - Brighton at $27M, including ordinance or law coverage for the code-upgrade component the broker referenced.
- Keep the blanket for the eight lower-hazard centers, sized to a PML study rather than to a round number.
- Move wind/hail to a $100,000 per-location deductible and require roof replacement or a hail exclusion with buy-back at Brighton.
- Price the CAT separately so the insured can see what the hail exposure costs; a 10% decrease is not available on any combination of these structures.
Before quoting: the 2019 appraisal is stale and the 1997 roof has no inspection. Get a current replacement-cost report on all 11 - a limit built on 2019 values creates a coinsurance penalty even after the insured pays to fix it.
3. What three items of information would change your appetite for this account?
Read the worked answer
1. Roof condition across the portfolio. Brighton's 1997 membrane is already the source of a $6.4M loss. An inspection report showing remaining useful life, hail bruising, and replacement schedules on all 11 roofs would let me decide between writing the CAT exposure and declining it. If two more centers have 20-year-old TPO, the account is a CAT accumulation problem, not a real estate account.
2. A modeled CAT loss at portfolio and county level. A vendor hail model at 100-year and 250-year return periods, run on the geocoded schedule, tells me whether the $54M county TIV is a $10M expected loss or a $40M tail event. That number, not the historical loss run, sets the limit and the pricing.
3. The ten-year loss run and prior carrier history. Five years is thin for a CAT-exposed book. Ten years would show whether hail is recurring at these locations, and whether the prior carrier non-renewed because of roof condition - which the submission currently omits.
Two secondary items I would also require before binding: confirmation of whether the Brighton code-upgrade requirement is ordinance-driven (which determines the ordinance-or-law limit) and a current schedule of any outstanding fire-protection impairments. Without items 1 and 2, my appetite is limited to the eight non-hail centers on a scheduled basis.