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What Does Concentration of Risk Mean?

Here we look at the meaning of term ‘Concentration of Risk’, as well as catastrophe limits or event limits, for Group Life.

What Does Concentration of Risk Mean?

Here we look at the meaning of term ‘Concentration of Risk’, as well as catastrophe limits or event limits, for Group Life.

As well as understanding the risks associated with an organisation and its members, group risk insurers will also assess how it affects their broader book of business. 

Understanding their concentration of risk, and setting catastrophe limits, helps insurers manage their exposure.  

Concentration of risk became an issue following the 9/11 terror attacks in the US. The attack, which saw more than 2,750 people lose their lives in the World Trade Center, highlighted the potential for claims from a single event to exceed a group risk insurer’s reserves. 

Catastrophe limits for Group Risk

To address this, insurers introduced a catastrophe, or event, limit on group life insurance. This is the maximum the insurer would pay on an organisation’s group life policy if a catastrophic event, such as a terror attack or a major industrial accident, happened.

Insurers take several factors into account when setting the catastrophe limit. 

Location is key, both in terms of the risk of an event happening but also the concentration of risk. 

This focus on location means there are some areas, for example the City and Canary Wharf, where catastrophe limits are lower.

 In both of these areas, there are lots of organisations employing large numbers of well-paid people with generous benefits packages. Unfortunately, some of these factors also mean there is a higher risk of terror attacks. 

Insurers also consider their overall risk portfolio. As a catastrophic event could potentially affect all the organisations within the area, insurers will assess their exposure and may look to reduce a limit if they are already close to capacity.

For Group Life, when assessing the locations of the members, we also take into consideration any concentrations of risk. We consider not only the quotation but what other liabilites we have on-risk or have quoted for. An Event (or Catastrophe) Limit may be applied either at scheme or location level if it is appropriate to limit our liability should there be a catastrophic event. For example, Canary Wharf is a hot spot for most insurers. This is due to it being a major concentration of financial institutions in close proximity of each other which have higher than average earners.

Catastrophe limit example

This example shows how a catastrophe limit works.

An organisation has 300 employees working in its offices in Canary Wharf. They’re well-paid, with an average salary of £100,000, and have generous benefits packages, including life insurance at four times salary. This means the total sum insured is £120 million.

There are lots of organisations and employees based in Canary Wharf so the concentration of risk is high plus the area is a potential target for terrorist attacks. 

Given this, the insurer imposes a catastrophe limit of £100 million.  

This means that, if an event takes place that results in multiple claims across the organisation, the insurer will pay out a maximum of £100 million.

Cover considerations

Although these events are rare, it is important that organisations are aware of the catastrophe limit on their group life insurance policy, especially where it is lower than the total sum insured. 

In many cases, it won’t be an issue. It is unlikely that every member will be in the building at the same time, with some on holiday or working from home. This could potentially reduce the exposure to below the catastrophe limit.

Where this still leaves a potential shortfall, an organisation can ask for a high limit. This may be possible, in exchange for additional premium, but it will depend on an insurer’s capacity and risk appetite. 

Likewise, where the catastrophe limit is significantly higher than the exposure, an organisation could reduce costs by asking for a lower limit. This may be possible with the shift to home and hybrid working reducing the number of members in the workplace at any one time. 

Another strategy where the catastrophe limit is lower is to spread the cover across multiple insurers. Known as split insurance, this is more complex than using one insurer but it will enable an organisation to benefit from multiple catastrophe limits. 

Thankfully, catastrophic events are few and far between but organisations need to be aware of the catastrophe limit on their group life policy and have a strategy in place if it is below their total sum insured.