Stop-loss insurance

Stop-loss insurance provides protection to those involved in land development such that they can insure for the potential extra costs associated with planned remediation. In order to obtain this insurance, considerable review of the site investigation reports and the cost estimation has to be undertaken in order to get an acceptable degree of comfort regarding the risks involved. 

Normally the insured (the developer or contractor) is responsible for anticipated costs of remediation together with an additional sum (the buffer amount) in excess of the anticipated costs. After these amounts have been exhausted, the stop-loss insurance activates and indemnifies for any additional costs of remediation thereafter. 

A further variation of stop-loss insurance is on sites where there are no planned remedial works to be undertaken because, after due investigation, no evidence is found of any unacceptable contamination. Provided it can be clearly stated what would constitute unacceptable levels of contamination on such a site, insurance can be provided for the eventuality of unacceptable contamination being found during the course of a development, even though none was expected. Such... 

Unfortunately, we cannot stop there and use equation (23.11). The benefit of using global factors is that they help compute cross-market terms and constitute the skeleton of the matrix. The drawback is a loss of resolution at the local level. A solution to this problem is to replace local blocks by a local covariance matrix computed using the full set of original local factors. Off-diagonal blocks need to be adjusted in the process to insure that the final matrix is positive definite. A more detailed discussion of how the local covariance blocks are replaced can be found in Stefek. Local covariance blocks can be computed individually for each market, but also for emerging markets spread factors and currency factors. As a result, shorter half-life can be used for return series that are typically more volatile, such as currency and emerging market returns. 

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