Simple Covers and Terms

These examples assume claims from one flood event affecting one location and causing (150k, 30k, 20k) USD loss to (Building, Contents, BI) unless stated otherwise.

Simple Covers

A contract in Contract Definition Language (CDL) must have at least one cover. A cover must have a share, can optionally have a limit, and can optionally have an attachment. For a simple contract with just one cover, the cover acts on the sum of claims in the contract subject. Contract Subject refers to the position to which the contract applies (whether a risk, a schedule of risks, or a position in a structure).

  1. First the attachment applies, if one is present.
    • If the cover’s subject is less than the attachment, the cover pays zero.
    • If the cover’s subject is more than the attachment, the subject minus the attachment is sent to the limit.
    • If there is no attachment, “net of attachment” is the cover’s subject loss.
  1. The limit applies, if one is present.
    • If the net of attachment is bigger than the limit, the full limit is sent on to the share.
    • If the net of attachment is positive but smaller than the limit, the net of attachment is sent on to the share.
    • If there is no limit, the “limited loss” is the net of attachment.
  1. The share applies
    • The limited loss is multiplied by the share to produce the contract payout.

To see how CDL allows for more complexity in covers, see Complex Covers. For this simple cover example, assume the following CDL:

Contract
 Declarations
  Currency is USD
 Covers
  80% share of 100k xs 20k

A claim of 50k flows through the cover:

  1. Net of attachment is 50k-20k = 30k
  2. 30k is less than 100k, so limited loss is 30k.
  3. 80% of 30k is 24k, which is the contract payout.

Similarly:

  • A claim of 10k would produce 0 payout.
  • A claim of 20m would produce a payout of 80k.

Simple Sublimits

In addition to covers, CDL contracts can have terms that act first on the subject loss to reduce it before sending it to the covers for payout. The two types of terms are sublimits and deductibles. Sublimits act to cap subsets of the subject claims. Any loss in excess of sublimits is not eligible for payout by covers.

  • If the claim is below the sublimit, the total claim is eligible for recovery.
  • If the claim is above the sublimit, only as much as the sublimit is eligible for recovery.

Assume that a sublimit of 60k for Building, Contents is added to the previous Simple Covers example:

Contract
 Declarations
  Currency is USD
 Covers
  100% share of 100k
 Sublimits
  60k for Building, Contents

The 60k sublimit applies to the 180k of claims from Building and Contents. Loss above that is not eligible for recovery. The “net of terms” to which the cover applies is 60k + 20k BI = 80k. Since 80k is less than the cover limit of 100k, the contract payout is 80k.

Simple Deductibles

Like sublimits, deductibles are contract terms. They act to reduce the subject claims and send that which is recoverable to the covers. Unlike sublimits, which discard losses above a certain threshold, deductibles discard losses below a certain threshold.

  • If the claim is below the deductible, none of the claim is recoverable.
  • If the claim is above the deductible, the claim minus the deductible is potentially recoverable.

Assume that a deductible of 20k for Building, Contents is added to the previous Simple Covers example:

Contract
 Declarations
  Currency is USD
 Covers
  100% share of 100k
 Deductibles
  20k for Building, Contents

Of the 180k of claims for building + contents, 20k is deducted. 160k is potentially recoverable. This is sent along with the 20k of BI claims into the cover, which still applies the 100k limit.