Jumbo risk is an insurance policy with very high limits of insurance, either a large property line or a high limit of liability. For life insurance in the United States, for example, a jumbo insurance policy would typically have a face value of $1 million to $150 million, taken out by high net-worth individuals. These jumbo risks usually exceed the limits that insurers retain or have set for a life insurance risk.
For property insurance, the occurrence of a jumbo risk, needless to say, could present “damages of unprecedented magnitude” and be a catastrophic loss. An accident involving a commercial airplane or a cruise ship could result to hundreds of fatalities, as well as millions in property loss. In some cases, a jumbo insurance policy is underwritten by more than one insurance company since the insurers would be hesitant to take on such huge risks. When insurers accept jumbo risks, the insurer must cede significantly to reinsurers. Under CL 2014-42, in order to “protect the company against unusual number of claims as a result of jumbo policies issued, the company may avail itself of the catastrophe or stop loss cover abroad.” A jumbo risk can also be referred to as a major risk.
On the other hand, as a measure to control risks taken on, insurers have started adopting jumbo limits. A jumbo limit is defined as “a limit placed on the amount of coverage that may be in force and applied on an individual life for automatic reinsurance purposes. If such insurance exceeds the limit, the risk must be submitted for facultative review.” This jumbo limit is provided for in reinsurance agreements “to manage retention by limiting automatic binding authority.”
Under Circular Letter dated November 20, 1981, as amended by CL 22-2007, jumbo risk refers to risks where the annual premium on any one policy exceeds P500,000. Jumbo risks may pertain to marine hull insurance, fire, engineering, industrial risks, among others. Under CL 22-2007, “premiums may be paid in four quarterly equal installments, provided that the first installment shall include all taxes due and other charges. In case of default in any installment due, all remaining unpaid installments shall be treated as non-admitted asset.” Moreover, under Circular Letter dated November 11, 1982, “direct business is required to be transacted on ‘cash-and-carry’ basis under Section 77 of the Insurance Code, except in cases of Jumbo risks where a different mode of premium payment is allowed under our Circular Letter of November 20, 1981.”
Jumbo risks are taken on by high liquidity and net-worth insurers. Interestingly, Warren Buffett spoke of jumbo risks in a 2001 letter to his stockholders in speaking for National Indemnity, a subsidiary of Berkshire Hathaway: “Indeed, we have a major competitive advantage because of our tolerance for huge losses. Berkshire has massive liquid resources, substantial noninsurance earnings, a favorable tax position and a knowledgeable shareholder constituency willing to accept volatility in earnings. This unique combination enables us to assume risks that far exceed the appetite of even our largest competitors. Over time, insuring these jumbo risks should be profitable, though periodically they will bring on a terrible year.”
Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.