CPD Session: Assets/Property exposure assessment and Maximum Probable Loss (MPL)

On the topic of assets/property exposure assessment and Maximum Probable Loss (MPL), Gauteng Women In Insurance (GWII) hosted a Continuous Professional Development (CPD) session on 14 March, proudly sponsored by F&I Insurance and F&I Re.

André Pienaar, Director and Principal Underwriter at F&I Re (Pty) Limited took us through the purpose of MPL, survey reports - factors affecting MPL, calculating MPL, applying MPL to treaty capacity and more.

Net and treaty exposure

MPL is the term used by underwriters to assess their net & treaty exposure on any single or number of risks.

The commonly used definition of MPL is, “MPL is the maximum monetary loss which could be sustained by insurers on a single risk as a result of a single fire or explosion when the most unfavourable circumstances combine and when, as a consequence, the fire is not at all or not satisfactorily fought, and is therefore only stopped by impassable obstacles or by lack of physical property.”

“Insurers make use of MPL’s to ensure that they are applying the correct amount of capacity (or participation) on any risk so as not to over-expose themselves or their treaty partners. Reinsurers impose minimum MPL factors onto treaties to minimize the impact of any single loss to the treaty. MPL’s assist insurers to more accurately assess possible “de-risking” opportunities like facultative reinsurance,” said Pienaar.

“Insurers have reinsurance treaties that are made up of net (that which the insurance company holds for their share of any exposure) and treaty (that which the insurance company lays off to reinsurers). This is an automatic and pre-agreed arrangement that takes the form of a treaty slip. It can also be in the form of a reinsurance binder,” added Pienaar.

Factors affecting MPL

According to Pienaar, good and credible survey reports will look at all the contributing factors of exposure, along with the definition and application of the MPL - what is the most likely event with the highest impact on the risk? Where would this event take place at the risk location? What is the impact of this risk event on the rest of the business? Are there any business interruption dependencies? Would this event affect the insurance policy sub-limits? Is the physical affected area of the location perfectly separated from other areas or would they also be affected?

Pienaar then went on to give an example of calculating MPL and applying MPL to net and treaty capacity.

“MPL failure could happen when a survey report is not accurate or certain risk factors are overlooked or missed by the surveyor. This is a most unlikely event these days as survey reports are more thorough and scientific. However, most insurers do also purchase MPL failure cover either via their treaty or a separate MPL failure cover. But reinsurers will ask questions and want to know what the circumstances were for the failure,” he said.

“Insurers must ensure that the survey reports that they work off are credible and have been performed by qualified and professional surveyors. A miscalculated or non-credible MPL can over-expose insurers and reinsurers. Most insurers have their own in-house surveyors or engineers who do most of their survey reports. There are very credible and reliable survey companies out there that also employ experts in all fields of engineering who produce excellent and very accurate reports for insurers and brokers,” added Pienaar.

In his concluding remarks, Pienaar said more experienced underwriters will always “build in a bit of fat” into their MPL’s and apply their capacity accordingly… just in case. “If the survey report is not thorough or credible, then use the total sum insured of the top location as your exposure. Murphy’s law approach is the safest.”

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