1st May 2010 morning did provide some heart-troubling scenes for those who were within the Golden Triangle location to witness. Morons made moronic decision – just because those pilots were senior and experienced crew, with each having clocked over 10,000 flying hours, it was alright to have the Boeing 747 – 400 gliding through some rooftops of couple of iconic buildings…. By the way, the plane was actually flying some 2,000 to 3,000 feet above ground level, just above the 88-storey Petronas Twin Tower!Boy! It sure looks like it is going to crash…. at that point in time.
The public was concerned and the authorities from the Department of Civil Aviation (DCA) thought this was real mind-boggling stunt we do not need. Many who had witnesses 9/11 thought this is going to be a repeat of that event. Flying too close to Kuala Lumpur’s iconic building is not something we want to see nowadays.
Wonder when these morons made the decision, did they ever consider checking with their aviation insurer. I bet they did not and even if such request is made, the answer is not going to be a YES. While I may not want to dispute over their risk management analytical ability in ascertaining the remoteness of an untoward incident occurring, if at all such an event did occur, the mess is not going to be small. Especially with so many high rise buildings located within close proximity to one another.
POSSIBLY A MESSY SCENARIO….. If it did occur, would the property damages come to RM1 billion ringgit? What about the lives lost in the process – did they have it calculated – maybe their computation sheet shows those under-privileged and terminally ill children do not worth much of a dime! But, they may had forgotten those on the ground….. Can I estimate some RM40 million worth of PA and Life insurances pay-out from this joy-ride misadventure?
Have you then forgotten the plane…… which could costs the insurer some RM200 million? Alright… the aviation insurer(s) may not want to pay and prepare to dispute the claim. But then, because of the fronting involvement, the primary insurer must still put in the necessary reserves pending any litigation process. This reserve takes up substantial charges on capital….. CREDIT RISKS. The legal liability aspects are not going to come cheap anyway – especially those coming from the building owners, businesses, passengers and of course those people at the ground level…. Isn’t this a big mess?
A STRESS TEST ON INSURER’S EXCESS OF LOSS PROTECTION…… Perhaps the above scenario may be abit of an over-reaction. Such devastating losses may be too remote… But we can always conduct a simple test if insurers did have enough Excess of Loss cover when any near devastating loss actually occurred. How much do most insurers in town have within their Non-Marine Excess of Loss (XoL) protection cover? Rule of thumb is 5 times of the insurer’s FIRE gross net retention (ie. before treaty) but if it involved risks underwritten on Probable Maximum Loss (PML) and/or on target-risk basis, the Non-Marine XoL total cover may have to add up to 6 times or more.
However, if much of the iconic buildings (closely located) around town were also accepted on PML and target-risk basis, then the rule would have to be fixed at nothing less than 7 times. (It is good to remember most if not all insurers underwrite property risks without much analysis of risk accumulation in respect of a specific location….. unless this relates to a single building, but combining with the other building across the road or just beside it is not a norm. And then, it is a fact reinsurers do allow insurers to determine the definition of what is deemed as one risk. Therefore, retentions are alway set on basis of a single building rather than combining all buildings nearby….) Thus if the insurer has a FIRE gross net retention of RM10 million, the Non-Marine XoL total cover should be RM70 million. If you have maximise your gross net retention for 10 close-by iconic as well as mega buildings within the Golden Triangle location, any total loss would hit the RM100 million mark.
As already mentioned, this is not difficult to understand – insurers mostly determine “single-risk” on the basis of a single building and not inclusive of building(s) nearby!
Thus, is your Non-Marine XoL cover measuring up to some possibly joy-ride? I am sure is a resounding YES, but it is no harm rethinking through the whole process….. YOU MAY HAVE MORE THAN A JETLINER ENGAGING IN SUCH JOY-RIDES THE NEXT TIME AROUND!