Cumulation is the sum of risks for which a significant number of insurance objects can be damaged, destroyed or completely lost. At the same time, these structures can be insured under various contracts and for large sums insured. In other words, risk cumulation is a set of maximum possible losses, or PML (Probable Maximum Loss), under insurance contracts, when an insured event occurs due to the same incident. It can be a hurricane, earthquake, flood, tsunami and other natural disasters.
Example of risk cumulation calculation
As you know, insured events are specified in the insurance contract. After their occurrence, the insurance organization is obliged to proceed with payments. How to calculate cumulation? Let's take an office building as an example. Suppose we have six rooms located in the same building. These areas are insured by separate agreements, for each of which the sum insured is eight million rubles. As already mentioned, cumulation is the sum of risks. Threat assessment determined that a severe fire could destroy an entire building. In this situation, the amount of PML under each insurance agreement will be eight million rubles, and the cumulation of risks will beis equal to forty-eight million rubles.
Factors affecting cumulation
Cumulation is a phenomenon, the size of which is influenced by the geographic coordinates of insurance objects. Here it is necessary to emphasize that objects with different addresses are not always located at a sufficient distance from each other. Therefore, they can be damaged or destroyed due to one insured event. On the other hand, objects located at the same address can be so far away from each other that they are not affected by a single event. Based on this, we can conclude that when determining the amount of cumulation, one should take into account both the physical address of the insurance objects and their actual location relative to each other.
Cumulation period
The cumulation period is a time period during which the occurrence of the same insured event causes the maximum possible losses of the insurance company. It should be noted that when establishing the period of maximum cumulation of risks, the duration of the concluded insurance agreements is of great importance. In addition, it is important to take into account the sums insured that are specified in these contracts.
