Customer Concentration

Why it matters for underwriting

High customer concentration means that the loss or default of a single counterparty can materially damage the insured’s revenue base, independent of any physical damage event. For business interruption underwriting this matters because a customer’s own disruption – a fire, insolvency or contract termination – can directly reduce the insured’s turnover, and the effect is amplified the more revenue sits with that one relationship. For trade credit underwriting, concentration converts an ordinary counterparty default into an accumulation exposure that can consume a disproportionate share of the policy limit.

Capturing the attribute and evidence

Proposal forms ask for the percentage of total revenue represented by the largest customer and by the top three to five customers combined, together with the nature of the relationship (spot sales, framework agreement, exclusive supply). Underwriters corroborate the declared figures against the insured’s revenue breakdown by customer, key account contracts, and, where available, credit reports or rating agency information on the major customers named.

Effect on coverage, premium and conditions

Diversified customer bases with no single relationship exceeding modest revenue shares support standard terms and pricing. High concentration on one or a few customers typically leads to a sublimit or named-customer restriction on contingent business interruption extensions, closer credit assessment of the customers concerned under trade credit cover, and a loading that reflects the accumulation risk; deteriorating financial standing of a dominant customer can trigger a condition or exclusion specific to that relationship.

Mitigation measures

Recommended measures include actively diversifying the customer portfolio, negotiating longer notice periods or minimum-volume guarantees in key account contracts, monitoring the financial health of dominant customers on an ongoing basis, and maintaining credit insurance or factoring arrangements to cushion the financial impact of a major customer’s default.