AR02 - Solutions to Cessioning Practice questions

No.1

 Risk should be ceded according to Class “C” in the table of retentions because
the occupancy type is warehousing.
 We consider definition of “one risk”. Different locations but same occupancy
(warehousing). One type of cover under one policy is desired. Therefore the
whole submission can be taken as one risk.
 It is acceptable practice to consider making cession based on “top location” or
“target location’ for one risk with many locations.
 Steps:
o Obtain prudent PML for all the locations;
o We ensure that 50% minimum PML condition is observed;
o Compare the PMLs (adding PML on contents, buildings and 100%
BI sum insured) for all the locations.
o We have to add 100% BI sum insured to each location PML since
we do not have a split of BI values for each location.
o Use the highest PML obtained at any of the locations as the basis
for cessioning.

No. 2

Steps
o It has to be decided whether to cede based on full contract value or should we
consider the phase with highest value at risk? In other words, what is one
risk?

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 o It is theoretically possible to consider each phase as one risk subject to
reasonably sufficient contrast in the technical & contractual details of each
phase. The technical /physical construction process, needs, etc, & insurance
cover required for each phase would have to be so different to necessitate
consideration as distinct risks and hence different policies could be issued.
o In this example, we have insufficient information to make the above decision.
o We could ask for more information and discuss with the broker our concerns.
o Also, the treaty does not allow us to use PML for engineering cessions.
o If we cannot obtain more details, we should cede the risk based on the total
contract value.
o The TPL limit should also be ceded in same proportion as the main works, and
only up to the Limit (15m) allowable to the treaty.
o In this case study, there is no table of retention for Engineering works, so we
use 100% of gross line

No.3

Steps
o ALOP is excluded from the treaty;
o Therefore ignore both the sum insured & the premium for ALOP
o No consideration to table of retentions since, for purposes of this case study,
the table is not available for engineering occupancies.
o Full Contract value is basis for cessioning. The treaty does not allow us to use
PML for engineering cessions
o The TPL limit should also be ceded in same proportion as the main works, and
only up to the Limit (15m) allowable to the treaty.
o In this case study, there is no table of retention for Engineering works, so we
use 100% of gross line

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No.4

 Risk to be ceded as Class A.

 We have a PML supported by a survey report; but we also have a policy limit
of indemnity.
 The PML is a technical risk concept describing the maximum probable
scenario.
 On the other hand, the Indemnity Limit is a Contractual limit that defines to
what monetary extent (re)insurers are liable – regardless of the actual
probable loss situation.
 In this case, the Limit is lower than the PML! The broker or insured is buying a
lower limit than the worst case scenario that can actually happen!
 The underwriter should discuss with the broker to increase the limit equal to
or slightly above the PML.
 Absent an adjustment of the Limit, cession to the treaty should be made based
on the PML and not the Limit!
 Why, you may ask: The aim is to reflect the correct loss probability in the
exposure since, technically, our interest on the potential loss is the PML
exceedance probability.
 The Limit is still retained on the original policy.
 Please note that Munich Re discourages cessions based on loss limits unless
such a limit is preferably higher than the Probable maximum loss. UW should
ensure to check and discuss with the broker.
 If there is a total loss and claim is above the (re)insured limit, it falls back to
the insured.

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No. 5

 According to the treaty, the hotels would belong to Class B, and

thatched buildings belong to Class C.
 However since this is both a hotel & is thatched, we consider always,
the lower class, C.
 Since no PML is available on the two locations, for purposes of
cessioning, we consider the Top Location (area with higher sums
insured) and take its Total Sum insured.
 Do not make unfounded assumptions about PML without a survey
report of the type described in the treaty.
 Add BI sum insured to the Top Location TSI.

No. 6
We examine the “one risk” concept. Then as the Reinsured’s
underwriter, I have the liberty to decide what one risk shall be. We then
take the highest PML scenario available and use it as a basis.
 Out of the “various” occupancies, we check that none is
excluded. All are covered.
 However, GTPL is excluded and not ceded to this treaty (i.e. that
coverage can be covered separately and ceded to Casualty
treaty)
 The different occupancies fall in different classes in the table of
retentions.
 There is insufficient information regarding the actual physical
location of each of the “activities”. We cannot sufficiently make
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 out if some of the PML scenarios / occupancies accumulate with
each other. So, one PML may (or may not be) be insufficient as
a basis for cession.
 E.g. we don’t know if the warehouse is 5 metres or 2km away
from the soda factory or the offices, etc...
 Is it the intention to take this as one risk? If yes, I, the UW has to
verify the Target risk / Top Location & the highest available PML
scenario in this cluster of activities. That would be the cession
basis.
 Warehousing PML not known. Do not assume it! Either verify
with Risk engineer or consider full TSI for cession basis. It is the
highest valued location. Confirm that it’s PML does not
accumulate with surrounding property – then use it as a basis for
cession.
 If it is confirmed that the activities are distinct locations, it might
also be considered to take each location as a separate “one risk”
and separate policies are usually preferable and such would be
ceded separately into the treaty. If the activities have different
loss experiences, this decision is easier. In any case, they also
fall in different categories in table of retentions.
 The take away is that – obtain sufficient information to confirm
what you prefer as “one risk” and place the cover as such, plus a
realistic PML scenario, then use for cessioning.
 If all locations are taken as one risk, under one policy, and ceded
on Top PML scenario basis, then Class C has to be used – i.e.
the class for the lowest quality occupancy.

No. 7

o FG is covered under Misc acc. Section of the treaty.

o Confirm there are no restrictions on the activity of “banking”. In this treaty, this
is not excluded, so coverage is available.
o Two options are available for cession but one of them is the wrong basis. Do
not use “any one employee” as the basis for cession.
o Collusion Limit of 25,000,000 is the correct cession basis. Why – because it
the highest probable loss scenario for this cover – i.e. an FG loss involving
multiple employees.
o Retention: USD 5,000,000. Treaty Cession: USD 20,000,000 (4 lines)

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No. 8

 Money insurances are covered by the treaty, and this treaty does not explicitly
exclude Financial institutions.
 We need to decide the basis for cession to the treaty. It is acceptable to add
the limits for Transit and Premises – as long as the underwriter can
reasonably foresee a loss situation involving both arms of cover. That is the
conservative approach. In this case, you would cede on the basis of $
65,000,000 as illustrated below:

 It is also acceptable and usually the likelier option for the UW to consider the
higher of the two Limits (premises or transit). The understanding here is that it
is highly improbable to have a single loss scenario triggering both the
premises and transit limits to the maximum. Therefore we take the higher limit
of USD 50m as the basis for cession.

No. 9

o You need to first verify the precise occupation or activity of “WZ Company
Ltd”. What do they do? Is their core activity mining? Or is the mining sector
just their customer? Mining risks have to be referred to the Lead reinsurer for
approval before they can be ceded to the treaty.
o It is clear that WZ is a transport contractor who just happens to use his trucks,
lorries, or other automobiles to offer transport services to the mining sector.
o Reinsurers are mainly worried about the risks which are directly related with
the activity of Mining.
o Please always consult your Leading treaty reinsurer if you are in doubt or not
sure if a particular business is excluded or not or what table of retention to
use.
o Basis of cession is “any one conveyance”. Each declaration will be considered
as one risk and ceded to the treaty as such and since each declaration can be
USD 10m or less, precise cessioning depends on “actual declaration”.

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No. 10

 Unlike in question no. 9, the core activity of PQ Company Ltd is Mining.

Therefore, this risk has to be referred to the Leading reinsurer for assessment
and approval.
 Being a Mining operation, obviously more UW info would be submitted than is
shown in our working example.
 PML is not known. Unless you can verify from a professional Property survey
report, it is suggested you use full sums insured i.e. USD 155m as a basis for
cession. In any case, since this is a referral case, the reinsurer would usually
advise the manner in which the risk should be ceded and what is considered
an acceptable PML.

By Aggrey Mwesigwa & Stanley Mandeya.

29.07.2013

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