Managing windstorm claims and understanding the business interruption implications
Andrew King BCom ACA FCILA FUEDI-ELAEHead of Claims Consulting & Risk Accounting, EMEA Aon Global Risk Consulting
London, 25 May 2012
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Agenda
Review of modern business interruption coverage
Policy problem areas Issues facing clients when losses
occur Some solutions Lessons learned
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Top 10 Risks – Aon Global Risk Management Survey
Risk rank 2011 2009 2007
1 Economic slowdown Economic slowdown Damage to reputation
2 Regulatory/legislative changes Regulatory/legislative changes Business interruption
3 Increasing competition Business interruption Third-party liability
4 Damage to reputation/brand Increasing competition Distribution or supply chain failure
5 Business interruption Commodity price risk Market environment
6 Failure to innovate/meet customer needs Damage to reputation Regulatory/legislative changes
7 Failure to attract or retain top talent Cash flow/liquidity risk Failure to attract or retain staff
8 Commodity price risk Distribution or supply chain failure Market risk (financial)
9 Technology failure/system failure Third-party liability Physical damage
10 Cash flow/liquidity risk Failure to attract or retain top talent
Merger/acquisition/restructuringFailure of disaster plan
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When a loss occurs Business Interruption cover pays for:-
Loss in consequence of insured damage:-– Loss of gross profit/gross revenue due to reduction in turnover– Increased costs of working/extra expense to reduce or avoid the reduction
in turnover– Cover is restricted to a period of time – the maximum indemnity period– Extensions can be added to cover suppliers, customers, utilities denial of
access, loss of attraction.
A well constructed BI policy will:-– Provide cash to pay the ongoing fixed costs of the business– Fund the extra costs needed to keep the business operating – hopefully as
part of a thought through and tested business continuity plan– Allow the business to come through the incident with its operations
maintained and its reputation enhanced
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Why getting BI cover right has never been more important
Insurance provides vital contingent capital in the event of a large loss in a difficult market.
Alternative and expensive fund sources might be:– Raising debt and /or equity capital– Borrowing from the bank– Using group funds /reservesNone of which may be available in
the current market
If your policy fails to pay totally, partially, or on a timely basis and no other funding source is available what will you do.
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The consequences of getting it wrong
Delays, uncertainty and a reduction in the claim value
Management distracted from business issues on to insurance claim issues
Severe financial strain on the business
Inability to make crucial recovery decisions due to uncertainty/lack of funds
Cessation of trade and closure due to insolvency
Probable legal action Risk manager “leaving to pursue
other interests” Everyone is a loser.
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Business Interruption coverage
Loss in consequence of damage at the premises
Property based and triggered by damage
The basic premise of 2012 BI policies is the same as the 1939 original
Meanwhile…..
Business organisation, design and activity has undergone massive change
Complex supply chains Outsourcing of some or all
manufacturing activity JIT Cost reduction programmes Global marketplace 24/7 global communications
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Business Interruption - modern coverage
Perils extended to “All Risks”, but with exclusions and definitions – now include:-– Storm ( including damage caused by heavy snow)– Flood– Earthquake– Tsunami– Strikes– Murder, suicide, infectious disease etc etc
“Damage” extended beyond the insured’s own property and now includes:-– Damage “in the vicinity” (denial and hindrance of access, loss of attraction)– Damage to suppliers and customers premises (contingent business
interruption)– Damage to utilities
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What are the problem areas
1. Low sums insured/declared values– Wrongly defined fixed and variable expenses– Failure to account for or disclose new acquisitions or rapid growth– Failure to make year end declarations
Consequences when a loss occurs:– Delay; reservation of rights– Application of average to reduce LOGP and ICW settlements– Importation of average clause in declaration linked non average policies– Some lawyers consider that significant under declarations constitute
misrepresentation of the risk, allowing insurers to void the policy– The table below shows this issue is a major, widespread problem
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CILA Conference Proportion of policies where declaration too low
If too low, severity of the shortfall
2008 37% 50%
2009 52% 63%
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What are the problem areas
2. Indemnity Period too short– Two phases of a BI loss: Reinstatement and Recovery
Consequences:– Loss (now uninsured) continues beyond MIP– Problems with increased costs as end of MIP approaches – may not be
recoverableTwelve months is too short for a maximum indemnity period.
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Length of interruption period
Recovery period
1 day 4 days1 week 60 days
1 month 180 days6 months 730 days
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What are the problem areas
3 . Policy Extensions– Suppliers and customers extensions
• Poor understanding of exposure and/or non existent disclosure to underwriters
• Poor understanding of the risk by underwriters and carriers claims managers
• Single source supplier supplying crucial components• Lack of understanding of suppliers operation and lead times for crucial
plant and machinery• Existence of contractual fines and penalties• Reliance on one major customer
Consequences:• Exposure to major uninsured risk• Potential avoidance by insurer
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Other issues
Machinery lead times– Tied to one supplier– Availability of specialist
engineering resource Building issues
– Non standard construction– Neighbour and local authority
issues, eg re-zoning– Tenant – lack of control over
building repairs Denial of Access and Loss of
Attraction– Unclear wordings make cover
ambiguous
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Issues facing clients suffering losses – Pharmaceutical/surgical supplier
Client supplied medical kits and eye products to surgeons and opticians;
– Pharma, surgical, and vision care divisions
Warehouse damaged by windstorm exposing stock
All stock written off by MHRA despite much being triple packed
Most products sourced from suppliers on a “campaign” basis
BCP plan enacted:– Emergency site activated– Stocks held in Europe recalled– Suppliers organised to produce
replacement stock at premium prices– Small loss of sales, large ICW claim– 12 month MIP adequate – just. Increased to
24 months upon renewal
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Issues facing clients - Hotel in Prague
Direct damage, denial of access, loss of attraction
Damage repaired within three months Major conference auditorium
attached and owned by hotel Many customers cancelled
conferences booked for 9, 12, and even 15 months forward.
Insurers argued that cancellations in advance were not loss in consequence of damage
Indemnity period 12 months Sum insured inadequate so client
suffered a shortfall in recovery of loss of revenue and ICW’s
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Issues facing clients - Hotels
Hurricane Michelle 2001 hits Cable Beach, Nassau.
West wing damaged, but hotel was able to trade on after clean up
Cancellations occurred One other problem caused by the storm
made the BI claim much worse……
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Issues facing hoteliers ……and guests!
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Solutions - Business Interruption Reviews
Checklist:-
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Sums insured/declared values
Indemnity periods
Policy extensions
Suppliers and customers
Calculations of MPL and NLE
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Business Interruption Reviews
When Your Organisation Might Need a Review…
New Product Launches
Rapid Revenue Growth
Acquisition or Sale of Site / Subsidiary
Change of Sourcing Habits
Streamlining Production Process
Change of Distribution System
Updated Business Continuity Plan
Large Change to Head Count
Concern about the Sums Insured/Declared Values and length of indemnity period.
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Solutions - Business Interruption Impact Analysis
Provides in depth quantification of business interruption impact of loss of: Key machine Key plant Key customer Key supplier
Calculates loss across the group using modelling
Enables client and insurer to understand the full monetary consequences of certain specified events
Enables client to target risk management resources and arrange coverage protection properly
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BCM is a business owned & driven process that:
Proactively improves an organisation’s resilience to an unexpected event
Provides a method of restoring an organisation’s ability to supply its key products and services to an agreed level within an agreed time
Helps manage a business interruption & protects the organisation’s reputation
What is it?
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What happens after an event?
Incident Response
Business ContinuityRecovery / Resumption(Back to Normal)
Incident ResponseFocused on safeguarding people, company assets and the environmentPreserving LifeDamage assessmentStabilisation & securityInitiating communicationInvoke Business Continuity
Business ContinuityFocused on managing the issues & implications around maintaining operations
Strategy perspectiveGovernance & directionStakeholder managementMedia / outward liaison
Recovery / ResumptionFocused on phased stabilisation, restoration and recovery of critical business processes
Recovery of infrastructureReturn to business as usualReview lessons learnt
Overall Objective – Back to normal as quickly as possible
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Lessons learned
A small PD loss can lead to a much larger BI loss
A badly managed BI claim will probably destroy a business
Brokers and insurers need to educate clients better
BI reviews, BIA and BCP’s are a must
Wordings need to evolve to provide the cover that clients demand
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