A Nonproportional Premium Rating Method for Construction Risks

Abstract

Correct pricing of nonproportional (primary or excess of loss) insurance for construction risks must consider not only how the insured property values build up over time, but also how the probable maximum loss (PML) changes. Conventional pricing methods for static property risks cannot be employed for construction risks, since the latter are characterized by PML patterns that change over time, as well as evolving loss exposures and perils arising from the various phases of the construction project. A further complication arises when delay in startup (DSU) is covered, because a DSU loss is triggered by a property damage loss and both losses contribute jointly to the erosion of an excess layer. This article describes a pricing method with analysis of specific cases of interest, including guidelines for creating practical excess of loss rating models.