business interruption values & exposures dempsey, myers & company quinnipiac university june...
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Business Interruption Values & Exposures
Business Interruption Values & Exposures
Dempsey, Myers & CompanyQuinnipiac University
June 14, 2006
Today’s PresentationToday’s Presentation
BI Basics BI Values Explained Values v. Exposures Hypothetical Claims
A Business Interruption PrimerA Business Interruption Primer
The purpose of BI coverage is to do for the business what it would have done for itself had there been no loss.
Coverage generally triggered by physical damage.
Reimburses net profits, continuing expenses and expenses incurred to reduce loss
Optional coverage for extra expenses to continue operations
Duty to mitigate
Coverage Triggered by Direct Damage to Insured Property
Coverage Triggered by Direct Damage to Insured Property
Underlying Form: ISO/Proprietary/Manuscript
Extended Period of Indemnity Research and Development E-Commerce Extra Expense
Coverage Triggered by Damage to Other Property
Coverage Triggered by Damage to Other Property
Contingent Business Interruption Contingent Extra Expense Interdependent Properties Civil Authorities Ingress/Egress Service Interruption Leasehold Interest Royalties
Business InterruptionBusiness Interruption
Three Essential Variables:– Time– Revenue– Costs
Business InterruptionBusiness Interruption
Key Revenue Streams - 2006 ($2.95b)
State of Michigan38%
Federal programs
12%
Local and private programs
7%
Student fees24%
Auxiliary activities 13%
Departmental activities
4%Investments/Other2%
Business InterruptionBusiness Interruption
Expenditures and Surplus - 2006
Services17%
Scholarships10%
Operating expense
18%
G&A expense6%
Fixed/other4%
Surplus5% Instruction/research
40%
Business InterruptionBusiness Interruption
Reclassification of Expense Components
Variable Cost
64%
Semi-Variable Cost
21%
Fixed Cost10%
Surplus5%
BI Loss - Total SuspensionBI Loss - Total Suspension
$450,000-$350,000$100,000Net Profit
-$100,000$300,000$400,000Other Costs
-$450,000$50,000$500,000Variable Costs
$1,000,000$0$1,000,000Sales
LossActualProjected
BI Loss - Partial SuspensionBI Loss - Partial Suspension
$300,000-$200,000$100,000Net Profit
-$50,000$350,000$400,000Other Costs
-$250,000$250,000$500,000Variable Costs
$600,000$400,000$1,000,000Sales
LossActualProjected
Business Interruption LossBusiness Interruption Loss
Evaluate Nature of Revenue:– Will it abate in the event of loss?
State of Michigan appropriationsOther government aidStudent feesAuxiliary activitiesResearch grantsInterest
Business Interruption LossBusiness Interruption Loss
Evaluate Nature of Cost:– Will it abate in the event of loss?
Instructional costs (salaries, supplies)
Utilities and maintenanceAuxiliary expensesResearch costsGeneral & Administrative costsDepreciation and interest
What are BI Values?What are BI Values?
A projection of what the business
will do during a 12-month period
What are BI Values?What are BI Values?
Annualized estimates of net profit and “continuing” (fixed) expenses
May or may not include “ordinary payroll” (direct labor expense)
Computed for each insured location where earnings are produced
Policy requirement of most insurance markets
How are BI Values Used?How are BI Values Used?
To determine annual premium To allocate premium to business units To determine Probable Maximum Loss (PML) and Maximum Foreseeable Loss (MFL) yardsticks
To determine location limits of liability
To determine Average Daily Value (ADV) deductibles
BI Value Concernsof the underwriter
BI Value Concernsof the underwriter
Location exposures and values– Are high MFL locations properly identified? EQ and windstorm exposures
– Are significant interdependencies recognized in the underwriting process?
– Are significant CBI exposures disclosed?
– Are adequate loss control measures in place to reduce loss exposures?
BI Value Concernsof the risk manager
BI Value Concernsof the risk manager
Conceptual framework and accuracy– Do business units understand the purpose and importance of accurate BI value reporting?
Premium allocation– Are reported values calculated consistently among business units and locations?
Process efficiency– Is the right amount of data reported?– Is the collection process rational and efficient?
BI Value Concernsshared by risk managers and underwriters
BI Value Concernsshared by risk managers and underwriters
Accuracy– Are reported values based on reality?– Are values computed in a manner consistent with industry standards across all insurance markets?
– Are reported values suitable for calculating PML’s and MFL’s, and for allocating insurance capacity?
– Are reported values a reasonable basis for calculating premiums and determining location limits and deductibles?
Hypothetical Claim 1Hypothetical Claim 1
Dormitory FloodAssumptions Heavy rains flood basement and first floor
Dormitory evacuated Students relocated
– Hotels and other temporary quarters Two month repair period Ten students quit school, seek refunds
Hypothetical Claim 1Hypothetical Claim 1
Dormitory FloodAssumptions Heavy rains flood basement and first floor
Dormitory evacuated Students relocated
– Hotels and other temporary quarters Two month repair period Ten students quit school, seek refunds
Hypothetical Claim 1Hypothetical Claim 1
Dormitory FloodIssues Presented Value of extra expense loss
– Living expenses– Transportation
Value of business interruption loss– Lost room revenue– Lost vending profits
Hypothetical Claim 2Hypothetical Claim 2
Service Interruption - Student Center
Assumptions Natural gas curtailment in January No heat or hot water Building closed for one week
– Book Store closed– Food service suspended– Meeting rooms closed
Hypothetical Claim 2Hypothetical Claim 2
Service Interruption - Student Center
Issues Presented Value of business interruption loss
– Lost Book Store Profits– Lost Food Service Profits– Loss Mitigation
Value of extra expense loss– Meeting relocation costs
Hypothetical Claim 3Hypothetical Claim 3
Laboratory Fire - R&D LossAssumptions Biochemical experimentation US Government funded for fiscal 1997 Three-fourths completed at time of fire Entire experiment lost; nine months to replace Grant revenue $1 million; fixed cost $83,000/month
One month total suspension to repair fire damage Risk of losing future grants if fail to complete
Hypothetical Claim 3Hypothetical Claim 3
Laboratory Fire - R&D LossIssues Presented Value of business interruption loss
– Total suspension period - 30 days– Remainder of period - 9 months– Lost opportunities
Other potential losses– Expediting costs– Extra expenses
Q&AQ&A
Contact DetailsContact DetailsSharon Pisko Wolfe, CPADempsey, Myers & Company LLP426 Danbury RoadWilton, CT [email protected]
Karen Henricksen, CPA, CFEDempsey, Myers & Company LLP127 East 56th Street, 4th FloorNew York, NY [email protected]