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

0

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

$ m

illio

ns

Date%of%incident Maximum Indemnity%period

1

Pre initial meeting

4

Settlement phase

3

Ongoing review

2

Preliminaryreview

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

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

THB

000

's

MONTHLY TURNOVER

T/O - Actual T/O - Scn 1 T/O - Scn 2

Month of floodMonth 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

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

THB

000

's

MONTHLY TURNOVER

T/O - Actual T/O - RGL

Month of floodMonth of tsunami MIP

Page 18

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 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 Cnot flooded

Supplier 1unable to supply for 2 mths

Supplier 2unable to supply for 2 mths -

partial supply thereafter

Supplier 3not flooded

Local distributorFlooded for 3 mths

Customer Bnot flooded

Customer AFlooded 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

0

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-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

THB

Mill

ions

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"

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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

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Any questions?