managing windstorm claims and understanding the business ......aon global risk consulting . london,...

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

Aon Private–Confidential and Limited Distribution

Agenda

Review of modern business interruption coverage

Policy problem areas Issues facing clients when losses

occur Some solutions Lessons learned

2Aon Risk SolutionsProprietary & Confidential


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


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

Aon Risk SolutionsProprietary & Confidential


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.


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.


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



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



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


CILA Conference Proportion of policies where declaration too low

If too low, severity of the shortfall

2008 37% 50%

2009 52% 63%



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.


Length of interruption period

Recovery period

1 day 4 days1 week 60 days

1 month 180 days6 months 730 days



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



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


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



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……



Issues facing hoteliers ……and guests!



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

Aon Private–Confidential and Limited Distribution 18

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.


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?


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


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


managing windstorm claims and understanding the business ......aon global risk consulting . london,...

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