Tariffing of Consequential Loss Insurance

Extract

In the following, consequential losses after fires are considered. A generalisation to consequential losses after other risks is most likely rather trivial.

The purpose of this paper is rather asking questions and putting a problem before the readers than presenting solutions. According to our experience, little has been done to seek logical systems or to construct mathematical or physical models in order to study these problems. The volume of business is rapidly growing but it could grow much more if a more reasonable tariffing was made. Many insured with fire insurances hesitate to take out an additional consequential coverage. They can see the need of the coverage, but they will not accept—and rightly—the present market rates. Actuarial colleagues are invited to join in building up suitable models to guide the practical underwriter.

The office premium today is most often composed of the following parameters:

a. the premium rate of the corresponding fire insurance

b. the insurance sum, defined e.g. as the expected turnover less variable costs

c. the coverage period, an upper limit of the period in which indemnity can be given. In Denmark, for a period of 12 months the premium of a consequential loss' insurance is normally defined as the insurance sum multiplied by the fire premium + 25 per cent.

We shall regard various risk situations in order to study the relationship between the fire risk and the consequential loss. The most simple situation is an undertaking where practically spoken only total fire losses will occur. One may think of a fireworks factory or a telephone exchange building. The fireworks factory will burn out physically. After a fire the contents of the telephone building, even if the majority of the materials is at hand, will be worthless because of the corrosion caused by the PVC contents of the wires. In the cases mentioned, an outbreaking fire might, of course, be extinguished so early that practically no damage will occur. If the fire, however, exceeds a certain extent, a total loss is likely to follow.