Every answer and its explanation appears here once you have finished the path. Each one then links to the matching glossary entry, where the concept is set out in full with its worked example.
1. Why does confusing the retained share with a deductible cost dearly in this field?
Because a deductible removes a FIXED SUM and shrinks in percentage terms as the loss grows, whereas a retained share stays at ten percent on a five million loss as on a hundred million one: on rare and enormous losses the gap between the two mechanisms runs to tens of millions
The confusion suggests a THRESHOLD when it is a PROPORTION, and in a field where limits are written at two hundred million, that shade of vocabulary is worth the price of a plant. The answer about the order of deduction bears on a real computation question, which comes later and does not change the nature of the two mechanisms. The one calling the retained share never buyable anticipates the replacement question and gives too absolute an answer, since a group captive can carry it with the insurer's express agreement.
Glossary entry · franchise2. Why do insurers require this share, and why is the reason unflattering to the insured?
Because a FULLY COVERED investor no longer has a financial interest in the loss not happening: it may negotiate less firmly with the local administration, defer a costly compliance upgrade, let a concession deteriorate, launch an aggressive proceeding whose political cost falls on an asset that no longer costs it anything; none of these behaviors is fraudulent and all change the probability of loss
The reason is not accounting but BEHAVIORAL, and the amount is calibrated to stay painful. It also buys something more concrete that insurers rarely spell out: the conduct of the claim, an insured carrying ten percent having its own reason to build its chronology, to generate the record and not to settle too fast. That is the strongest argument against a client who wants rid of it. The disguised cut answer is the one the client makes and it misses that the insurer would often rather cover everything for more, if it could buy the alignment another way.
Glossary entry · alea-moral3. An insured places its retained share with a secondary carrier. What happens, even with no prohibition clause?
It no longer has any interest of its own in the loss, so the behavioral mechanism collapses, so the probability the principal insurer PRICED is no longer the right one: this is a change in the risk, with the usual consequences of misdisclosure, independently of any clause
There is worse, and nobody anticipates it: at claim time two insurers will have to agree on characterization, on the date of the triggering event and on whether to settle, while the insured, carrying nothing, HAS NO REASON LEFT TO ARBITRATE between them. The contractual freedom answer is exactly the worked case's, where the broker adds that the principal insurer has no way of knowing: that is false at the moment that counts, since the second carrier will have to be party to the discussions and will surface at the worst possible time.
Glossary entry · declaration-de-risque4. The lender requires the borrower to keep no uncovered exposure, the policy forbids insuring the share elsewhere. How to get out?
By having one of the two obligations amended rather than silently choosing which to breach, and it is the BANK COVENANT that gives way most often, lenders accepting a named exception once told the alternative jeopardizes the whole policy; the construction that satisfies everyone exists, having a group captive carry the share, which many insurers expressly accept since the risk stays in the group
The difference between placing with a third party and having a captive carry it is not technical but about the FINAL BEARER OF THE RISK, and that is the only criterion the principal insurer cares about. Lenders give way because a whole policy put at risk is exactly what they want to avoid, which makes this a short conversation when held openly. The discreet placement answer is the worked case's, and it stacks two independent consequences, contractual forfeiture on the WHOLE indemnity and an undisclosed aggravation that would survive even without a clause.
Glossary entry · retention-conservation5. A 240 million asset, a 180 limit, a 3 deductible, a 10 percent retained share. What does the insured bear on a total loss, and why is that figure never produced spontaneously?
81 million: 60 of underinsurance, 3 of deductible and 18 of coinsurance, those three terms sitting on THREE DIFFERENT LINES of the same document and negotiated by three different people; what is transferred is not 180 million but 159
The number on the front of the policy is 180; the number that counts is 159, and it is the only one that answers the question the committee thinks it is asking. The answer setting aside underinsurance as a choice states something true and inconsequential: chosen or suffered, it stays with the insured on the day of the loss. The one absorbing the retained share into the deductible invents an offset that does not exist and understates by 18 million. The discipline is one step: add the three terms BEFORE discussing the premium.
Glossary entry · principe-indemnitaire