By: Jeff Esper | June 28, 2016

I am not sure why policy language has to be so confusing. Truly there are some complicated risks that insurance covers, but even the simple ones seem to be made complicated by the language used. A good example of this is extra expense. The words themselves seem pretty self explanatory; a policyholder spends extra money due to an occurrence and submits the expenses as part of the claim. Though it sounds straight forward, within a property claim these expenses require different types of measurement, documentation and coverage. To ensure you are buying the right coverage for your risks, it’s important to understand the details and the differences.

Per the International Risk Management Institute (IRMI), extra expenses are defined as: 

…additional costs in excess of normal operating expenses that an organization incurs to continue operations while its property is being repaired or replaced after having been damaged by a covered cause of loss. Extra expense coverage can be purchased in addition to or instead of business income coverage, depending on the needs of the organization.” 

This is true, however there is another kind of “extra expense” that is included as part of your business income - this is commonly known as “expense to reduce loss.” These expenses meet the definition of extra expense, however, they are incurred to reduce the duration or magnitude of the business income loss.

Consider this scenario. A manufacturer is shut down because of a covered cause of loss. Despite damaged machinery, they manage to resume operations in the facility by performing work manually with more than normal labor. The extra labor costs enables the insured to maintain some production that reduces lost sales. Is this a business income loss, extra expense loss or both? 

In this case, extra expense coverage in excess of the business income would not be necessary since the extra expenses reduced the business income loss. Any sales that were lost could still be recovered as well. If only extra expense coverage was purchased, the manufacturer could recover the extra expenses but not any lost sales.

The distinction between “extra expense” and “expense to reduce loss” is important when you are placing coverage. Quantification and documentation of extra expense exposures depends on the types of expenses and the scenarios envisioned. If the only extra expenses that are foreseen would be to reduce a greater business income loss, then it might not be necessary to purchase the additional coverage. If business income is not at risk or can be avoided entirely with extra expenses, extra expense coverage may be the way to go.  

Another category of coverage that gets confused with extra expense is expediting expense. Per the International Risk Management Institute (IRMI) expediting expenses are defined as: 

…expenses of temporary repairs and costs incurred to speed up the permanent repair or replacement of covered property or equipment.

The need for expediting expense coverage came from a time when boiler and machinery coverage applied to specific objects written on separate policies. Modern all risk policies will include expediting expense as a part of expense to reduce loss or extra expense coverage.

Again it is important to understand how you might incur these loss related expenses when placing coverage. To the extent that you can save the insurance company money by expediting, you are less likely to meet resistance. If you will need to expedite repairs for other reasons, regardless of cost or time savings, you may need to get coverage that provides full reimbursement.

Understanding the different types of expense coverage and how they apply to your business risks is critical when buying insurance. You don’t want to find out how your coverage works during a claim or realize that you’ve been paying for coverage you don’t need. Think through your potential scenarios, consult your broker and a forensic accountant to explore what coverages and limits are best for your risks. Then, share your conclusions with your underwriter to make sure everyone is speaking the same language.

By Christopher B. Hess, CPA, CFE

 

By: Jeff Esper | May 02, 2016

If you are responsible for your company’s Business Interruption Values (BIV) reporting, we have a special offer for you! BIV reporting is possibly the most misunderstood data requirement of all lines of coverage. We hear it from brokers and policyholders across the country. It’s a concern for many and now you can find out how your values stack up.


RWH Myers now offers a simple and effective three-part system to assess the validity of a company's reported Business Interruption Values.


  1. First, we'll walk through a simple questionnaire that examines the process currently in place to pull together the numbers. The process used is a major indicator. Why? By looking at how you come up with your BI Values reveals what you may be missing and where potential problems are lurking.
  2. Next, we can review your current BIV reporting. With this step we can gain insight in to the output and what the underwriter is seeing. Any unclear or inconsistent numbers will create uncertainty in the mind of the underwriter and drive up premium costs. We'll ask the questions that your underwriter won't ask so that we can identify areas to improve.
  3. Finally, we'll do a BI Benchmark against others in your industry segment to see how your current BIV compares to the benchmark number. Our proprietary BI Benchmarking tool is a popular and useful tool that displays a ballpark BIV displayed in a "worksheet" like report summary. How will it compare to your numbers? There's only one way to find out.


The benefits of getting your grade are many. Once you know your grade we'll share with you what is hurting your score as compared to what you should be doing to increase the accuracy of your numbers. The way to a higher BIV Grade is the way to more accurate ratable BI values which is used to calculate your premium. This offer is free of charge to policyholders so there's nothing to lose by signing-up!


To sign-up for your BIV grade click here and we'll get started. You may contact me directly with questions. jeffesper@rwhmyers.com


By: Jeff Esper | December 15, 2015

The Right Way to Look at BI Values
As a professional loss accountant with more than twenty years experience with business interruption valuation, I can understand why policyholders struggle with their BI values. Over the years, some of my clients recognized the issues with the traditional BI values approach, and decided to make a change. Unfortunately, too many companies continue doing what they have always done, even when there is a better way available. The fact is that BI values are an important requirement of the insurance process. The challenge is finding a repeatable, efficient system that produces an accurate measurement of your BI exposure. 

Consider for a moment, just how important this information is to your underwriter. The numbers you report gives the underwriter the basis for writing coverage and calculating premium. Each renewal provides policyholders with the opportunity to present their unique BI exposure. Unfortunately, this opportunity is often squandered due to a multilateral misunderstanding of business interruption values and the exposures they represent. The point of this article is to share an alternative approach that is proven to help policyholders take control of their BI values reporting while maximizing the opportunity to enhance the value .

Understanding BI Values
First, there’s the Ratable Value. It is the “big number” that is calculated for the business as a whole assuming a twelve month total shutdown of all revenue generating operations. This worst case and often unrealistic scenario is the information requested by the insurance company, usually in the form of a one page worksheet. Without additional information, the underwriter will use this information to set limits and charge premium. The ratable value calculated is somewhat meaningless, except that it establishes the base assumption that is used as the BI value in all other scenarios, such as un-incurred cost categories. The ratable value is seldom a reflection of your exposures. A better way to assess your exposures are to examine your MFL and PML loss scenarios.

What is Maximum Foreseeable Loss?
The maximum foreseeable loss (MFL), as the name indicates, is the worst case scenario. This is not as extreme as the ratable value scenario, but pretty close. The assumptions used here include a complete breakdown of protection and loss mitigating factors while hitting you where it hurts at the worst possible time. An example would be the loss of a unique distribution center to a retailer during the holiday shopping season - say the distribution center that handles online orders going up in smoke on Cyber Monday. The factors used to measure the ratable value would be used here to determine the business interruption value for this scenario. Certain assumptions may change depending on the duration of the loss scenario. For example, labor expense may be considered completely saved in the ratable value scenario due to the assumption that there is nothing left, but only partly saved in an MFL scenario.

What about the Probable Maximum Loss?
The probable maximum loss (PML) is the same as the MFL, except that loss mitigation efforts and protections work properly. The PML also takes into account pure extra expenses used to retain customers. This can help with decision making on purchasing extra expense coverage.

What happens in underwriting?
Though I’m not an underwriter, I’ve typically seen insurance company’s take an engineers approach to MFL and PML scenarios that vary only in duration. This is singular perspective and does not account for the rest of the pieces of the puzzle. The other pieces are the finer details that actually occur during a claim. If it were a real claim, topics like seasonality, make-up and outsourcing would surely come up, but you won’t see them on any BI worksheet. 

The MFL and PML should be based on realistic loss scenarios and measured as if it were a claim. Simply applying the ratable value to loss period assumptions produces misleading and inflated numbers. This is precisely why it is in your best interest to develop your own valuation method based on real scenarios.

Why create Exposure Scenarios?
If BI values are based on assumptions and you are using the worksheet, then the assumption is a 12 month loss scenario. Can you imagine a scenario in which your operations would only be effected for 6 months? The worksheet makes a blanket assumption of 12 months whether realistic or not. Coming up with various loss scenarios by location would flush out a more realistic representation of the impact of each particular loss. It would further flush out high risk locations along your supply chain which will not only add value to your risk management approach but may also influence business continuity planning. 

An exposure analysis project is not only an accounting project, it’s a integrated business exercise offering multiple benefits to an organization. The goal is to identify and examine loss scenarios and the resulting the ripple effects. It isn’t necessary nor is it practical to anticipate every possible loss scenario. It’s better to prioritize by perceived risk and probability. Then, develop a good sampling of loss scenarios from which you can determine the impact to operations and the mitigating actions that would be taken. Depending on the exposure, involve the appropriate internal personal e.g. operations, sales, business continuity, IT, and accounting. The external experts you may involve are your broker, legal counsel and of course, a forensic accounting firm that specializes in insurance work. Additionally, your company’s Business Continuity Plan (BCP) and incident response plan, should be factored in accordingly.  How ever your scenarios play out, the loss accountants can calculate the business interruption as though it were an actual claim. 

As you can see, this approach would produce a more accurate BI value by location and overall. It’s the right way to look at business interruption so make it a part of your approach with underwriters. If you’d like to discuss this topic or any others, myself or my partners would be delighted to hear from you.


Published 12-17-15: InsuranceThoughtLeadership.com

Category: Insights 

Tags: BI Values 

By: Christopher Hess | January 16, 2015

Companies have many risk management concerns. It’s a part of business and a part of life. So which areas are of most concern to risk managers today?


According to the fourth annual "Allianz Risk Barometer," which surveys over 500 risk managers and corporate insurance experts, business interruption (BI) and supply chain, natural catastrophes and fire/explosion are the biggest concerns at the start of 2015. This should come as no surprise considering this unstable global environment. With today’s integrated business world, the ripple effect from catastrophic events affects businesses in ways that are hard to fully comprehend. We all remember the 2011 Tohoku earthquake and tsunami. The endless images and footage of the massive destruction is forever imprinted in our minds, and the ripple effects reached deep into the insurance industry. Companies worldwide that depended on Japanese suppliers suffered a supply chain disruption creating a wave of contingent business interruption (CBI) claims. Calculating these CBI claims was not the trouble. The coverage issues related to how policies defined “suppliers” left many companies without coverage.


So what does this mean to risk management?


If you concur with the survey results, then it’s a sign that you may need to examine these risk areas a little closer. You may not be able to avoid a loss, but there are steps you can take to make sure you are prepared for what could happen. If you want to be prepared, the best solution is a study we call “BI Values and Exposures”. First, we will analyze and correct the BI values that are being submitted at renewal time. In our experience, the “worksheet” provided by your property insurer rarely produces an accurate BI value. Next, Risk Management will enlist the help of management, operations, sales and purchasing to fully identify and examine your exposures based on the loss scenarios that are of major concern. Our forensic accounting experts will then analyze each loss scenarios based on the probable maximum loss (PML) and maximum foreseeable loss (MFL) as if it were an actual claim. Armed with this knowledge, you’ll be able to better manage your risks, improve your insurance program and best of all; you’ll have less risk to be concerned about.


In the words of John F. Kennedy: “The time to repair the roof is when the sun is shining.”


If you have concerns about your values and exposures, or an actual claim, send an email to jeffesper@rwhmyers.com and he will arrange a call with one of our partners.


We are always available to you as a resource and service provider, and we are experienced, independent and devoted to the policyholder.


Read more about the "Allianz Risk Barometer" on InsuranceJournal.com


Category: Insights 

Tags: BI Values 

By: Christopher Hess | September 23, 2014

If you are like most companies, the annual ritual of filling out the business interruption worksheet is a nuisance administrative task. The worksheet is generally required by the insurance company to track changes in the business and may be used as the basis to price your program. Along with general industry knowledge, this worksheet may be the most important item that underwriters have at their disposal to price your risk. However, the worksheet is woefully inadequate to explain the intricacies of most businesses and is biased to err on the high side – which usually means a higher premium for you. For a routine that is regularly glossed over, the results can have some pretty substantial consequences.


The worksheet is meant to estimate the business interruption exposure for the policy period by estimating a value for the coming year. The business interruption value (BI value) is revenue minus certain specific direct variable costs, possibly adjusted to account for the payroll of for skilled wage employees who may be retained even if operations cease for a period. The result is an annual ratable BI value that assumes a complete outage for 12 months with no mitigation.


Only by coincidence can this BI value number come close to a realistic exposure to business interruption loss.


What does the ratable BI value tell the underwriter? In theory, the premiums required to cover the risk. How can this be when the number used is so unrealistic?


The underwriter would like to know more about your business. His problem is that he needs some mechanism to measure your risk against others in your industry. The BI values worksheet is an attempt to do this.


But, if the worksheet is so far off, what else can you do to tell your story?


You need to supplement the ratable BI value with information to differentiate your business from the pack. Developing realistic, worst-case loss scenarios, known as maximum foreseeable loss (MFL) and probable maximum loss (PML), and measuring them using a methodology that would actually be used in a claim is a better way to present your exposure. Measuring MFL and PML exposures will allow you to highlight your ability to mitigate losses through business continuity planning (BCM).


Just as improved physical safeguards generate lower premiums, adequate business continuity planning should also result in premium savings. This step is completely missed when providing the worksheet alone.


The effort to identify and measure exposures can be challenging — after all, it is impossible to predict everything that might happen. History of actual claims and current industry experience can be very helpful. In most cases, it is best to tackle this project in manageable pieces and try not to do it all at once. For example, start with the largest or most troublesome businesses or locations and work down from there.


This may end up being a multi-year project that will require some dedicated effort from you and third parties. But chances are the cost of a project like this will be justified by allowing you to make more precise decisions on coverage and possibly reducing premiums.


Published 10-3-14: InsuranceThoughtLeadership.com

Category: Insights 

Tags: BI Values