Catastrophe Specific Business Interruption Issues Justin Crick, - - PowerPoint PPT Presentation

Catastrophe Specific Business Interruption Issues

Justin Crick, Partner, London

6 June 2014

Page 2

Page 3

Business Interruption insurance

! Policy – put the insured back into the same position but for the damage – subject to the policy wording ! Other / Special circumstances clause ! Relevant policy extensions include: ! Sue and labour ! Denial of access ! Loss of attraction ! Supplier / customer extensions ! Public utilities extension

Page 4

Business Interruption insurance in a CAT scenario

! Complicated set of circumstances ! Wide Area Damage ! Policy extensions ! Contingent Business Interruption ! Limited resources

Page 5

Practical considerations – the Insured

! Business Interruption will not be high on the priority list early on ! Staff and property are the initial priority ! Physically re-establish the business ! Mitigation options ! Cashflow constraints ! Then BI will be a priority

Page 6

Practical considerations – Insurers

! Support their customers ! Ensure the right people are on the ground ! Policy response / liability ! Initial loss estimates ! Interim and final payments ! Reinsurance considerations

Page 7

Forensic Accountants – the perception

! Acting on behalf of Insurers to reduce the number ! “us” verses “them” ! Out to find mistakes ! Over complicate matters ! Excessive and unnecessary document requests

Page 8

Forensic Accountants – the reality

! Support the loss adjustment process ! Dedicated and experienced resource ! Simplify complex loss scenarios ! Preparation of loss scenarios to assist the Insurers to reach a supportable settlement ! Assist the Insurer’s recovery from Co- and Re-Insurers

Page 9

Stages of an assignment

20 40 60 80 100 120 140 160 180 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 $ millions

Date%of%incident Maximum Indemnity%period 1

Pre initial meeting

4

Settlement phase

3

Ongoing review

2

Preliminary review

Page 10

Stage One and Two – Pre initial meeting & preliminary review

! Goal - to report to the Adjuster on: ! Potential extent of loss ! Preliminary calculation for payment on account purposes ! Key issues – no surprises later down the line ! Identify way forward ! Stage one – pre meeting ! Research ! Initial estimates ! Preparation for the initial meeting ! Document requests

Page 11

Initial document requests

! Why …to enable an understanding of the Insured and to improve the productiveness of the initial meeting ! Balance between obtaining the appropriate information v over-burdening the Insured ! Five key initial requests ! Monthly management accounts for the prior two years ! Monthly sales, in volume and value, for the prior two years ! Monthly production records for the prior two years ! Budget in place as at the time of the incident ! Initial loss estimates, if prepared ! Readily available (i.e. source documents/raw data) and easy to collate

Page 12

Initial meeting

! Need to leave with and understanding of ! The business and key drivers ! The impact of the incident ! Mitigation measures taken, envisaged success and costs thereof ! Key documents utilized by the Insured ! Set expectations ! Process ! Raise awareness of potential issues ! Economic limits ! Underinsurance ! Reporting

Page 13

Real life example: Thai Floods - Automotive sub-component manufacturer

100,000 200,000 300,000 400,000 500,000 600,000 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 THB 000's

MONTHLY TURNOVER

T/O - Actual T/O - Scn 1 T/O - Scn 2 Month of flood Month of tsunami MIP

?

Policy

• 6 mths standing charges
• Prevention of access

extension

• No supplier / customer

extension Issues

• No tsunami “make-up”
• 1 major customer - flooded
• Matching recovery to mirror

its customer

• Production possible from

Feb 12

Page 14

Interim payments

! Pressure to make an interim payment but ….. ! Lack of documentation ! Open issues ! Ongoing review ! Caution when basing interim payments on % of sum insured ! Underinsurance ! Potential make-up ! WAD ! Insured’s requirement

• v -

Recoverability under the policy

Page 15

The dreaded document request list

! Should only request what is necessary ! The request should be prioritised ! Should be clear why each document is being requested ! Should use the Insured's names for their documents ! Should use the Insured’s source records

Page 16

Stage three – ongoing review

! Additional specific document requests ! Review and analysis ! Impact of actual data on preliminary loss estimates ! Preparation of calculations ! Update meetings with the Insured ! Consider need for other experts

Page 17

Real life example: Thai Floods - Automotive sub-component manufacturer

Issues

• Demonstrate that sales could

have been made to their customer’s overseas plants

• Separate legal entities – no

make-up

• Post reinstatement increase

due to Thai tax incentive

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 THB 000's

MONTHLY TURNOVER

T/O - Actual T/O - RGL Month of flood Month of tsunami MIP

Page 18

Stage four – settlement

! Issues have been raised – no surprises ! Worked with the Insured – appreciation

• f why assumptions have been taken

! Benefit of post reinstatement data ! Recommend supportable final settlement figure

Page 19

Summary

! Relatively simple case: ! Clear policy wording ! Stable historic growth ! Single major customer ! Initial review ! Potential extent of loss – sales loss based on trend analysis ! Potential payment on account – no sales loss as the major customer was flooded ! Settlement ! As a result of the provision of support were able to accept no supplier and customer WAD deduction ! Relatively swift and amicable resolution

Page 20

Wider impact on suppliers and customers

! An interpretation of the policy in CAT scenarios is to assess the loss based on the assumption the event occurred but that the Insured did not suffer any damage. ! This would encompass a detailed review of all customers and suppliers. ! Issues: ! Require a detailed understanding of the business ! Access to information ! Time / cost considerations ! Assumption led ! Will always be grey areas

Page 21

Real life example: Thai Floods – Flexible circuit board manufacturer

Supplier The Insured Customer Customer C not flooded Supplier 1 unable to supply for 2 mths Supplier 2 unable to supply for 2 mths - partial supply thereafter Supplier 3 not flooded Local distributor Flooded for 3 mths Customer B not flooded Customer A Flooded for 4 mths

Policy

• 4 mths standing charges
• No extensions

Other considerations

• Insured inundated for 2 mths

Page 22

Real life example: Thai Floods – Flexible circuit board manufacturer

200 400 600 800 1,000 1,200 1,400 1,600 1,800 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 THB Millions

MONTHLY TURNOVER

Actual Standard turnover Expected turnover after WAD Month of incident Indemnity period

Decrease due to damaged suppliers & customers Decrease due to prevention of access Loss due to "damage"

Page 23

Summary

! CAT loss scenarios inevitably increase the complexity of BI calculations ! Limited resources ! Clear and concise document request lists ! Raise awareness of potential issues early on ! Collaborative approach

Page 24

Any questions?