Cumulation is the sum of risks by which a significant number of insurance objects can be damaged, destroyed or completely lost. Moreover, these structures can be insured according to different contracts and for large insurance amounts. In other words, risk accumulation is a set of maximum possible losses, or PML (Probable Maximum Loss), under insurance contracts when an insurance event occurs due to the same accident. It can be a hurricane, earthquake, flood, tsunami or other natural disaster.
Example of calculating risk accumulation
As you know, insured events are prescribed in the insurance contract. After their occurrence, the insurance company is obliged to proceed with payments. How to calculate cumulation? As an example, let's cite an office building. Suppose we have six rooms located in one building. These areas are insured by separate agreements, for each of which the insurance amount is eight million rubles. As already mentioned, cumulation is the sum of risks. When assessing the threats, it was determined that a strong fire could destroy the entire building. In this situation, the PML for each insurance agreement will be eight million rubles, and the cumulation of risks will be equal to forty-eight million rubles.
Factors Affecting Cumulation
Cumulation is a phenomenon whose size is influenced by the geographical coordinates of insurance objects. Here it is required to emphasize that objects that do not always have different addresses are 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 apart that they are not affected by a single event. Based on this, we can conclude that when determining the size of the cumulation 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 organization. It should be noted that when establishing a period of maximum cumulation of risks, the validity of the concluded insurance agreements is of great importance. In addition, it is important to take into account those insurance amounts that are prescribed in these contracts.