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

Catastrophe Specific Business Interruption Issues Justin Crick, Partner, London 6 June 2014

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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 3

Business Interruption insurance in a CAT scenario ! Complicated set of circumstances ! Wide Area Damage ! Policy extensions ! Contingent Business Interruption ! Limited resources Page 4

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 5

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 6

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 7

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 8

Stages of an assignment 180 160 Date%of%incident Maximum Indemnity%period 140 1 2 3 4 120 Pre initial Preliminary Ongoing Settlement meeting review review phase 100 $ millions 80 60 40 20 0 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 Page 9

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 10

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 11

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 12

Real life example: Thai Floods - Automotive sub-component manufacturer MONTHLY TURNOVER 600,000 Policy MIP Month of flood Month of tsunami • 6 mths standing charges 500,000 • Prevention of access extension 400,000 • No supplier / customer extension THB 000's 300,000 Issues • No tsunami “make-up” 200,000 • 1 major customer - flooded 100,000 • Matching recovery to mirror its customer ? 0 • Production possible from 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 Feb 12 T/O - Actual T/O - Scn 1 T/O - Scn 2 Page 13

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 14

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 15

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 16

Real life example: Thai Floods - Automotive sub-component manufacturer MONTHLY TURNOVER 450,000 Issues Month of flood MIP Month of tsunami • Demonstrate that sales could 400,000 have been made to their 350,000 customer’s overseas plants 300,000 • Separate legal entities – no 250,000 THB 000's make-up 200,000 150,000 • Post reinstatement increase due to Thai tax incentive 100,000 50,000 0 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 T/O - Actual T/O - RGL Page 17

Stage four – settlement ! Issues have been raised – no surprises ! Worked with the Insured – appreciation of why assumptions have been taken ! Benefit of post reinstatement data ! Recommend supportable final settlement figure Page 18

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 19

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 20

Real life example: Thai Floods – Flexible circuit board manufacturer Policy Supplier The Insured Customer • 4 mths standing charges • No extensions Supplier 1 Customer A Other considerations unable to supply for 2 mths Flooded for 4 mths • Insured inundated for 2 mths Supplier 2 Customer B unable to supply for 2 mths - not flooded partial supply thereafter Supplier 3 Local distributor Customer C not flooded Flooded for 3 mths not flooded Page 21

Real life example: Thai Floods – Flexible circuit board manufacturer MONTHLY TURNOVER 1,800 1,600 1,400 1,200 Loss due to "damage " THB Millions 1,000 Decrease due to damaged suppliers & customers 800 Decrease due to prevention of access 600 400 200 Month of incident Indemnity period 0 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 Actual Standard turnover Expected turnover after WAD Page 22

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 23

Any questions? Page 24