Problem of maximum loss

Due to the high concentration of values, the probable maximum loss (PML) must be estimated separately for each of the risk phases, also in the case of a high-rise building.

5.3.1 Construction phase

As is usual for all major projects, the PML estimate should be based on a separate assessment of the risk. In the case of high-rise buildings, fire will normally be considered a peril relevant to the risk and therefore form the basis for the PML estimate.

The measures required for active and passive fire protec-tion should not lead to any reducprotec-tion in the PML, since some of these measures only become fully effective when the building is finished.

This explains why fixed percentages are not specified here; at best, a deduction for the often extensive and ex-pensive foundation measures can be justified when as-sessing the parts at risk, since these foundation measures are not exposed to fire.

Depending on local conditions, exposure to windstorm, earthquakes and natural hazards may also be of relevance for the PML estimate during the construction phase.

5.3.2 Decennial liability insurance

The same considerations basically also apply to decennial liability insurance, except that here fire is replaced by the fairly rare risk of collapse. With major projects, it may also be advisable in view of the limited capacity available worldwide to introduce a limit of indemnity in order to facilitate placement of the risk.

5.3.3 Operating phase

From an underwriting point of view, the fire PML is the most important element during operation of a high-rise building. The PML for a given risk refers to the probable maximum loss which must be expected if the event oc-curs, with due regard to the conditions surrounding the risk and based on conservative estimates.

When estimating the PML of “normal” risks, we base our assessments on complexes, but this is not possible in the case of high-rise buildings, as they usually comprise only one complex. What is important, however, is that we – unlike many other companies – do not take account of the existing fire-protection facilities and precautions in our PML estimate. The following are disregarded in particular:

– Manual and automatic fire detection systems

– Fire-extinguishing equipment, such as wall hydrants, sprinkler systems, CO2or inert-gas fire-extinguishing equipment

– Efficiency of the fire brigade

These points are not considered to be factors which re-duce the PML because they occasionally fail when the in-sured event occurs. Structural fire-protection measures, such as fire-resistant construction practice, fire-resistant sealing and fire compartments (see Section 4.2.4.2), on the other hand, can be considered as PML-reducing factors.

Experience has shown that the total loss of a high-rise building is highly improbable, so that an assumed PML of 100% should remain the exception. Although fires result-ing in total demolition of the high-rise buildresult-ing are known to have occurred (see Section 4.2.3), this was essentially due to other reasons and not primarily to the impossibility of repair. Moreover, the total sum insured was not paid as indemnification in these cases.

On the other hand, we do not believe that it is right to specify flat-rate percentages of the sum insured as the PML for high-rise buildings, nor to define a certain number of floors as determining the PML, as is sometimes done.

We believe that an individual approach is required which takes into account the following criteria:

– Form of the building – Construction practice – Internal layout – Facade design

High-rise buildings are frequently erected on a podium with one or more levels. When estimating the PML, it is important to establish whether a fire breaking out in the podium can spread to the rest of building or whether this is prevented by protected fire-resistant separations. Three forms of building must be taken into account here:

– small dot-like layout/towering building,

– flat slice-like building (length of the building equals at least three times its width),

– large sprawling layout (base area in square metres equals at least 50 times the height of the building in metres).

88 WORLD TRADE CENTER, NEW YORK

5 Insurance Page 152

The probability that entire floors will be gutted by fire is highest in the case of the first group of buildings.

With the second group, subdivision into fire compart-ments is more likely, if only on account of statutory re-quirements with regard to the length of rescue routes. If the partition walls have been correctly designed and di-mensioned, a lower percentage loss may therefore be assumed per floor.

An even larger number of fire compartments is to be ex-pected with the third group of buildings, and this should reduce the loss per floor still further. Going purely by the form of the building, the percentage PML must be highest in the first and lowest in the third group.

Regardless of the form of the building, the combustibility of the materials used and the fire-resistance period of the parts must also be considered. The characteristics of the supporting structure and of floors as well as the fire-resist-ant elements protecting the openings to stairwells and ele-vator or service shafts are important in this respect. The facade design is a very important factor for vertical propa-gation of the fire and consequently for the PML. A fire must be expected to spread from one floor to the next if the window glazing is not fire-resistant and if the flashover distance between the windows on consecutive floors is too short.

The risk of fire spreading is even more serious if the build-ing includes an atrium, since the resultant chimney effect also has to be considered.

When estimating the PML, it is useful to consider the building’s supporting structure and its finishings separate-ly. The finishing work must be taken to include all non-bearing inner and outer walls including panelling, all building service installations and elevators, all doors, win-dows, floor coverings and ceilings.

In the past, it was common to do a 50:50 split on support-ing structure and finishsupport-ings, but this ratio has now changed to 30:70 on account of the more complex ing services and more extensive wiring in modern build-ings. Experience has shown that considerably less than 50% of the supporting structure of a high-rise building will be damaged by fire, depending on its type, particularly as regards its fire resistance. In the case of the finishings, on the other hand, the loss must be expected to be in the region of 40–100% due, among other things, to damage caused by smoke and fire-fighting water.

The highest percentage losses are suffered by the support-ing structure and finishsupport-ings in the first group of buildsupport-ings and the lowest by those of the third group. What has been said above must be considered one possible approach for estimating the PML and not as an algorithm, since numer-ous different criteria must be taken into account separately in each case.

In addition, such covered items as cleanup and demolition costs, increased costs of working due to conditions im-posed by the authorities and price rises during the restor-ation period, must be added to the PML. These are normal-ly first-loss risk items which should be included 100%.

So far, we have only considered the building as such. Its contents are normally insured separately, the policyhold-ers usually being the building’s uspolicyhold-ers or tenants. If the building is insured together with its contents, the PML for the contents must be taken as a cumulative figure when estimating the PML. Contents require similar consideration to interior finishings. Once again, special attention must be paid to “multi-occupancy buildings” (see Section 5.1.5).

How appropriate is it to specify a terrorism PML for high-rise buildings? In our point of view, there is little point in specifying such a PML, as we would not like to consider terrorism a “probable” event. Moreover, it is impossible to give any precise estimate of a loss due to terrorism and the PML would always have to be set at 100%.

A bomb attack is the most effective terrorist attack. It is perfectly conceivable that trained experts, such as special-ists in the use of explosives, could be used for the “most effective” result. After surveying the building, such spe-cialists can easily position their bomb or bombs in such a way that it will cause the entire building to collapse.

What is more likely, however, is that a car bomb contain-ing a large charge of explosives will be detonated in an underground car park or in the immediate vicinity of the high-rise building. The extent of the destruction is conse-quently a matter of chance and therefore hard to estimate.

It is necessary to adopt a country-specific approach to this issue, also taking account of the building’s location and occupancy. An office block in an industrial complex will undoubtedly be a less likely target for terrorists than a city-centre office tower. There have been sufficient ex-amples of such cases in the recent past.

If cover for terrorism cannot be excluded for reasons of market policy in a country with high exposure to terror-ism, then it is perfectly appropriate to assess the PML at 100% of the sum insured.

Earthquake exposure must also be taken into account for the PML during the operational phase. The major earth-quakes experienced in recent years caused such extensive damage to high-rise buildings as to make repair impos-sible (Mexico City, Kobe). Older buildings and particularly buildings with “soft storeys” (see Section 4.4) were worst affected.

When estimating the earthquake PML in regions exposed to this risk, it is therefore important to establish whether modern anti-seismic construction codes exist and whether they were also applied to the high-rise building under con-sideration. If these construction codes are known to have been violated or if there are any doubts in respect of com-pliance, then a PML of 100% should also be assumed for earthquakes.

The same applies to windstorm, volcanic activity and other natural hazards in regions exposed to these particu-lar risks.

5.3.4 Accumulation control

This problem must be considered above all in conjunction with the perils windstorm, earthquake and fire primarily in respect of buildings covered by CAR, EAR or fire policies.

Page 153 5 Insurance

This naturally only applies to areas or cities with a corres-ponding concentration of values in the property insurers’

portfolios.

Munich Re has already stated its views on this subject in a number of publications; it has also drawn attention to the need for accumulation control and issued corresponding explanations.

As far as the natural hazards windstorm, earthquake and flooding are concerned, the values currently at risk in the respective exposure zones or specific catastrophe scen-arios are determined using computer-aided data analyses.

The respective loss accumulation zones and correspond-ing loss potential are then determined for these catas-trophes.

We will gladly answer any queries from our clients on such issues.