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B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’ *Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822, Phone: 0207 265 0777; [email protected] Date: 30 / 01 / 2007 Prepared for: Opera, London Presented by: Markus Heiss*, MDD

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Page 1: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

B R I N G I N G F I G U R E S I N T O F O C U S

Commodity Prices Spike following Major

Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

*Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822,

Phone: 0207 265 0777; [email protected]

Date: 30 / 01 / 2007Prepared for: Opera, LondonPresented by: Markus Heiss*, MDD

Page 2: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Introduction

Accounting Issues

Legal Issues

Page 3: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Introduction

Accounting Issues

Legal Issues

Page 4: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Objective BIObjective BI

Do what the business would have done for the insured had

the ‘loss’ not occurred

Page 5: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Adjustment ClauseAdjustment Clause

Policy Definition: “The Turnover / Gross Profit during the period in the 12

months immediately before the date of the damage”But Variation Clause:

“…to which [Rate of Gross Profit, Standard Turnover and Annual Turnover] such adjustments shall be made as

may be necessary to provide for the trend of the business either before or after the loss or which would

have affected the business had the loss not occurred so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the loss would have been obtained during the period

after the loss”

Page 6: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Projection Dilemma

If price spikes occurred – 2 options for projection:

No Disaster

Disaster

Page 7: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Commodity Prices and Disasters

Commodities

Timing

Drivers

Price elasticity and leverage

Page 8: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Daily Crude Prices – Timing

Brent and WTI Daily Crude Prices

55

57

59

61

63

65

67

69

Day

$/B

arr

el

WTIBrent

Page 9: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Commodity Price Drivers

Market Supply & Demand

Contractual

Negotiation

Competitor

Political Climate

Domestic and International

Issues

Environmental Circumstances

Financial Markets

Market Circle

Page 10: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Pre loss Post Loss

Selling Price 100 10% 110Raw Material Cost -50 10% -55Margin 50 55

Leverage Effect of Price Changes

Page 11: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Refinery Margin Evolution

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

$ pe

r B

arre

l$

per

Bar

rel

Page 12: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Margin and Crude Cost

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05

Month

US

$ (0

00)

Margin Crude Cost

Page 13: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Segregation of Price Spike Impact on BI

Cause

Degree

Separation

Amounts can be put into their buckets

Page 14: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Segregation of Price Spike Impact on BI

Price Spike

Insured Event Other ‘Market’ Reasons

Caused by ‘Insured Peril per Policy’

Caused by ‘Physical Loss that Triggered

Policy’

Page 15: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Impact of Price Changes for BI Measurement

Gross and Net Profit

NoYes

Loss Make up / Mitigation

Deductible

Sum Insured / Under insurance

Economic Limits

ICW / EE

Continuing – Fixed Costs

Variable Cost

Revenue

Gross and Net Profit

NoYes

Loss Make up / Mitigation

Deductible

Sum Insured / Under insurance

Economic Limits

ICW / EE

Continuing – Fixed Costs

Variable Cost

Revenue

Page 16: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Impact of Price Changes for BI Measurement

XGross and Net Profit

NoYes

XLoss Make up / Mitigation

XDeductible

XSum Insured / Under insurance

XEconomic Limits

XICW / EE

XContinuing – Fixed Costs

XVariable Cost

XRevenue

XGross and Net Profit

NoYes

XLoss Make up / Mitigation

XDeductible

XSum Insured / Under insurance

XEconomic Limits

XICW / EE

XContinuing – Fixed Costs

XVariable Cost

XRevenue

Page 17: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Impact of Price Changes for Refinery

XGross and Net Profit

Refinery

PossibleLoss Make up / Mitigation

PossibleDeductible

XSum Insured / Under insurance

XEconomic Limits

PossibleICW / EE

Usually Not

Continuing – Fixed Costs

XVariable Cost

XRevenue

XGross and Net Profit

Refinery

PossibleLoss Make up / Mitigation

PossibleDeductible

XSum Insured / Under insurance

XEconomic Limits

PossibleICW / EE

Usually Not

Continuing – Fixed Costs

XVariable Cost

XRevenue

Page 18: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Impact of Price Changes for Steel Mill

YesGross and Net Profit

Steel Mill

PossibleLoss Make up / Mitigation

PossibleDeductible

YesSum Insured / Under insurance

YesEconomic Limits

YesICW / EE

PossibleContinuing – Fixed Costs

YesVariable Cost

YesRevenue

YesGross and Net Profit

Steel Mill

PossibleLoss Make up / Mitigation

PossibleDeductible

YesSum Insured / Under insurance

YesEconomic Limits

YesICW / EE

PossibleContinuing – Fixed Costs

YesVariable Cost

YesRevenue

Page 19: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Impact of Price Changes for Power Generation

YesGross and Net Profit

Power

PossibleLoss Make up / Mitigation

DependsDeductible

PossibleSum Insured / Under insurance

YesEconomic Limits

YesICW / EE

No (poss)Continuing – Fixed Costs

YesVariable Cost

PossibleRevenue

YesGross and Net Profit

Power

PossibleLoss Make up / Mitigation

DependsDeductible

PossibleSum Insured / Under insurance

YesEconomic Limits

YesICW / EE

No (poss)Continuing – Fixed Costs

YesVariable Cost

PossibleRevenue

Page 20: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’
Page 21: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Timing Issues – Price Changes and Profitability

Correlation Input and Output

Timing

Buyers or Sellers Market

Market Transparency

Pricing Mechanism

Page 22: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Hurricane Induced vs. Normal Commodity Market

Price Changes

Page 23: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

Accountants Assistance

Can we Solve ?; Can we help ?– Identify impact on BI measure– Market price investigations– Separation of loss sustained between market

event / period and loss related increases

Need to work with other experts / detailed evaluation market situation – determine market price drivers

Page 24: B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’

B R I N G I N G F I G U R E S I N T O F O C U S

Questions ?

*Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822,

Phone: 0207 265 0777; [email protected]

Date: 30 / 01 / 2007Prepared for: Opera, LondonPresented by: Markus Heiss*, MDD


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