Renewal terms for a plastics processor with a 145% loss ratio

Start from the loss record. Written premium of LKR 39m against LKR 89m of losses over three years is not a pricing problem that a small increase fixes; it is a risk-quality problem. Any renewal must be conditional on physical improvement, and the terms must be priced on the corrected risk, not the expiring one.

Terms I would recommend:

• Sum insured: LKR 900m looks light for a 4,000 m² factory with plant and polystyrene stock. Insist on a professional revaluation including debris removal and professional fees, and index the sums insured, with average applied if the values prove wrong.
• Excess: LKR 500,000 is far too low for a risk of this size with two fires in three years. Move to LKR 5m, and LKR 10m for fire following hot work.
• Warranties and conditions precedent: sprinkler system maintained, valve open, pump tested and certified quarterly by an approved contractor; a written hot-work permit system; a stated maximum stacking height and clearance under heads. These are not negotiating points - they are the price of cover.
• Premium: base it on the PML and the fire load rather than on the sum insured, with a loading for the loss record and a claims-experience adjustment at renewal.
• If the client refuses a warranty: offer a much higher excess, or exclude fire originating in the compressor room, rather than granting a flat renewal.

What to tell the broker. A flat renewal transfers the cost of the last three years to the insurer's shareholders and reinsurers. Declining to write a bad risk is a legitimate underwriting decision; writing it at a loss is not being 'commercial'.

Why the treaty comes first. The treaty gives automatic capacity only up to a per-risk retention of LKR 150m. A LKR 900m line cannot be written on a gross basis; the underwriter must be able to place the excess or must reduce the commitment.

Estimating the exposure. Calculate a PML: assume total destruction of buildings and plant in the worst compartment plus the fire load of the finished goods, racking collapse and debris removal. If the PML is, say, LKR 400m, the facultative layer is LKR 150m–400m and the insurer's net is LKR 150m. Show the assumptions; a PML without workings will be challenged by the reinsurer.

What the facultative market will want:

• the full survey report and photographs, not a summary;
• five years of loss runs;
• sprinkler maintenance and pump-test certificates;
• the PML calculation and its assumptions;
• the proposed wording, warranties and excess.

If facultative is not fully placed. The underwriter must not sign for more than treaty capacity plus the placed facultative. Writing a LKR 900m line with only partial reinsurance creates an unauthorised net exposure and breaches underwriting authority. The options are: bind only up to the placed limit with a coinsurance clause, decline, or reduce the sum insured to fit the treaty capacity. Note that the facultative pricing will be driven off the survey, which is a further reason the warranty package is not optional.

Two possible defences, one strong and one weak.

• Sprinkler warranty: a warranty that the valve be kept open is a promise by the insured. Breach discharges the insurer from liability from the date of breach, whether or not the breach caused the loss; and if it is drafted as a condition precedent to liability, the insurer must show the breach is connected to the loss - here it plainly is, because sprinklers could not operate. This is a good defence, but establish who closed the valve and when, and whether the insurer's own surveyor recorded it as open.
• Late notification: 11 days is not 'immediate', but a notification condition is generally enforced only where the insurer has suffered prejudice. Eleven days rarely creates prejudice. Do not build the repudiation on this ground alone.

Before repudiating:

• Obtain the fire brigade report and a forensic electrician's report - this is the second fire in the same compressor room and the coincidence must be explained.
• Interview the maintenance contractor and match service records against the warranty.
• Check whether the insurer's pre-renewal surveyor saw the valve open, which would support a waiver or estoppel argument.
• Consider whether the insured's conduct was reckless and whether suspected arson should be reported.

If the warranty defence holds, decline in writing, cite the clause and the breach precisely, and tell the insured of the right to complain to the IRCSL. If the insurer prefers to pay and pursue recovery, do so only on written advice, because paying may waive the warranty point.