Page 271 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 10 Property reinsurance 10/3

Although the practice may differ between offices, the principal types of risks written in a property
department are:
• fire and special perils/material damage ‘all risks’, such as explosion, water damage, riot, earthquake,
burst pipes, flood, storm and many others;
• business interruption, covering the reduction in the gross profit as a result of a shortage in turnover
due to an insured peril;
• engineering risks associated with explosion of boilers or breakdown or collapse of machinery and the
subsequent interruption to the business; and
• contractors’ ‘all risks’ against damage to plant or to buildings in course of erection.

Other types of policies which may be found in the property department include:
• theft of property usually arising out of violent entry or exit to or from the premises;
• goods in transit to cover loss or damage to goods while in vehicles; and
• money insurance to cover loss through ‘all risks’.
The property insurer typically has thousands of policies on its books covering property risks against a
wide range of perils and for varying sums insured. Although underwriters are by definition ‘risk-takers’,
their concern in the first place is the possibility of any one or more risks being involved in a loss greater
than they are prepared or able to withstand. In other words: the amount which they have regarded as a
prudent retention, whether individually or collectively.

A1 Individual risk retention

Let us consider retention in respect of individual risks against the peril of fire. Insurers know that some
types of risk are more likely to have a fire than others because of the hazards associated with them on
account of trade processes or particular features of construction.

Example 10.1
A furniture manufacturer uses machinery, wood and other inflammable materials and is likely to be a more
hazardous risk than a modern, purpose-built office block. It follows that as the likelihood of loss is smaller for the Reference copy for CII Face to Face Training
latter risk than the former, the insurer will be more willing to retain a higher amount for it than the former.

The underwriter will have constructed a table of limits, which will indicate, based on the underwriter’s
Underwriter will have
perception of different types of risk and the claims experience of them, the amount of the sum insured constructed a table of
(or estimated maximum loss (EML) when that is the insurer’s underwriting basis) which the insurer is limits
prepared to retain for each individual one, according to its risk classification. Typically, the table
denotes relatively higher retentions for the ‘good’ risks than the ‘bad’ as shown in table 10.1.

Table 10.1: Table of limits
Risk classification Types of risk Insurer’s retention
1 Offices £1,000,000
2 Colleges, schools £800,000

3 Light engineering factories, hospitals, churches £600,000
4 Textile factories, TV manufacturers £500,000
5 Furniture manufacturers £250,000

These retention amounts are based on the sum insured or EML for the property and the classification of
the risk. These may vary between underwriters according to their own perception of the hazards. An
individual risk may be reclassified upwards on account of features which make it more attractive, such
as proximity to the fire brigade or the presence of fire-extinguishing appliances. Similarly, a risk may be Chapter
given an inferior classification due to the high proportion of combustible materials used in its
construction. 10
The table is based on the likely maximum amount of damage caused by an insured peril to an insured
Table is based on the
risk. There will be many risks for which the sums insured or EML exceed the retention and if the insurer likely maximum
wishes to accept the risk, it needs to have reinsurance facilities in place to be able to do so. Otherwise, amount of damage
caused
it may have to decline the risk or co-insure it. Therefore, the concept of retention is important as it helps
the underwriter to determine the amount of reinsurance cover required.