By: Jeff Esper | December 02, 2016

Why You Need an Independent Review at the Start
Losses that appear to be under deductible always benefit from an independent review. Deductibles for CAT losses have become more complex over the years and interdependent operations spread the impact across the organization, so it’s increasingly challenging to have confidence in the preliminary evaluation, especially when informing key stakeholders. Those who have had losses know, with hindsight, there are gaps in understanding and initial questions that are critical to the deductible evaluation. Avail yourself of a candid, independent review from the start so that whether you have a recoverable claim or not, you’ll be prepared.
  
Many policyholders engage forensic accountants when they are confident the loss exceeds the deductible, but few think to involve help when unsure. Experienced, professional help can highlight the key factors in this evaluation, and will provide a result you can rely on to make better decisions and reduce potential wasted effort.

Here are three reasons to make this step a standard risk management protocol for your company:

1. Deductibles Require Measurement

Under or over deductible is the first question once you turn your attention to the financial response. Deductible policy language has evolved over the years as insurers respond to claim nuances and program needs. The professionals at RWH Myers have assisted clients with quantifying deductibles and preparing claims throughout these changing times. We understand the languages quirks and can quickly scope out the magnitude of applicable deductibles.


2. Insurance Accounting is Unique

Loss accounting is a different discipline than financial or managerial accounting. Misunderstandings waste time and create unwanted transactional friction. Breed process efficiency with the right questions and meaningful answers from a team with experience translating managerial accounting into insurance loss accounting for policyholders.


3. Consider Motivations

Are operations overly optimistic?  Is finance overly pessimistic?  Might reporting a claim impact contingent commissions? Independent expertise will navigate through any biases to pull it all together in a way that answers the important questions based on their merits, ultimately facilitating the financial recovery process. 

No one can anticipate a loss and policyholders actively work to avoid them, but that doesn’t mean you don’t need to plan for when you have a claim. A candid, independent review will give you the confidence of an appropriate deductible threshold evaluation and segue into a smooth and fair claim process.

by William A. Warren, CPA, CGMA

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 | February 26, 2016

Q & A  with William A. Warren, CPA, CGMA

Contingent Business Interruption is a critical part of the business interruption and supply chain risks facing companies. You may have the coverage in your policy, but are you sure you have the appropriate language and an accurate measure of this exposure? It may be time to revisit this complicated risk area to prevent a costly surprise.An earthquake, explosion or Tsunami hits on the other side of world.


A key supplier is disabled bringing your production to a halt until an alternative supplier is in place and able to fill the void. Your company may suffer extra expense costs and/or a serious business interruption, i.e. contingent business interruption. Will your cover respond appropriately and make you whole?In this article, you’ll learn some important answers to critical CBI questions. I asked Bill Warren, CPA, CGMA and Partner of RWH Myers, an expert in valuing business interruption exposures, the following six CBI questions that policyholders need to know to get a handle on the relevance of their CBI risks.


When you do a BI values project for a client, do you always address CBI?

No. CBI exposure is a critical component in understanding and managing an organization’s risk profile, and it does adds time and effort to a first-party BI values and exposures project. CBI should be addressed as it’s own analysis to properly reflect the organization’s goal(s) and the complexities involved in meaningfully achieving those goals.


Does the BI worksheet ask for CBI?

No, the worksheet and schedule of values generally assigns an organization’s earnings contribution (BI value) to its own locations. CBI represents the interdependencies those earnings have on third-party locations. Therefore, CBI is separately addressed in the insurance program. Without specific information, the coverage (if it exists at all) is often sublimited to relatively small, tiered sub-limits for named vs. unnamed suppliers or customers. Even if specifically identified, appropriate terms and conditions are difficult to ask for, let alone get, especially if you don’t understand the risk yourself.


What is expected by the underwriter at renewal?

Renewals rely heavily on momentum … sometimes focusing only on major changes since prior years. Many programs have stable, incumbent participants who have been on the account for several years. Even when that’s not the case, there is usually substantial information from prior program marketing that is leveraged on an ongoing basis. The same goes for the policy’s CBI coverage. It has gained attention in recent years, and insurers are requiring more information to avoid limiting coverage terms in its absence.

How do we address CBI and what is the benefit of our approach?

The theory is to tie a third-party’s potential operational risk to the clients potential lost earnings. The method is always customized to the situation at hand. Even in the same industry, different organizations can employ a very different model that relies on a unique mix of suppliers/customers. Information about them is often buried in functional silos and can be difficult to identify. Even after we get the necessary information, it may be incomplete for the intended purpose. This is why our process is one of inquiry & discovery. There are some formulaic approaches to capturing data. Often the obvious, critical risks are known. However, the discovery process must include quality probing questions to identify potentially unknown risks, or simply, concerns that have not yet been communicated. We then build customized models that correlate this operational reliance to the potential financial impact. The models are designed for the organization’s financial reporting, accounting for additional internal interdependencies, inherent resiliency and explicit mitigation planning.


The benefits of this approach are many. At a high level, it provides an understanding of the potential magnitude of the exposures from these external risks so that clients can make informed decisions about the cost-benefit of mitigation planning as well as the risk transfer strategy, terms and pricing.

What are the common challenges with an inaccurate representation CBI risks?

The most common challenge is tying inbound raw materials and/or supplier spend (sometimes the only accounting data you really have about suppliers) to the potential revenue exposure if that one part/service were lost. Another typical challenge is obtaining ample information from the third party about their exposures, locations, and mitigation planning. A supplier will generally want to comply with their customer’s request for information, but the they generally do not want to burden their own customers with these requests. The latter is difficult enough in a real loss situation, let alone during an evaluation of potential exposure.The consequence of inaccurate representation could be a loss from a contingent risk that could have been proactively mitigated, consciously retained, or adequately transferred via a policy with appropriate coverage and limits. Even worse, after years of premium on CBI risk area, the insured learns the hard way, it’s either not an accurate limit or the coverage isn’t the right fit. It can be extremely frustrating, to say the least.

Why should policyholders seek help from an independent expert?

CBI is about protecting the balance sheet by protecting the continuity of earnings either via operations or insurance. To accurately express the risk that a supplier or customer disruption may pose involves a holistic look at the organization and its earnings streams. An expert will calculate the net earnings at risk to empower clients to make better cost-benefit decisions surrounding loss control, mitigation, and risk transfer. An independent expert brings an unbiased perspective. They are not constrained by the assumptions that internal personnel may make, and should not be directing the result to a predetermined outcome. They would have no agenda other than an accurate assessment prepared for the client.


Even when a company does examine CBI and supply chain risks, the project is often lead by procurement or operations functions and the results are not leveraged holistically for the benefit of enterprise risk management.


So, is it time to revisit your contingent business interruption risks? It’s a question worth asking inside your organization. Perhaps, Mr. Warren’s insights will help you come to the answer. In any case, it may be worth consulting with an independent and experienced expert to explore further. If your earnings are heavily dependent on direct suppliers and indirect suppliers, as well as direct customers and indirect customers, your CBI exposures may warrant a closer look.

Category: Insights 

Tags: Business Interruption 

By: Jeff Esper | May 28, 2015

The major storm and flood waters in parts of Texas and Oklahoma have caused death, destruction and despair affecting residents and businesses.  Those in Houston certainly remember similar experiences from Tropical Storm Allison in 2001.  Just like Allison, the waters will eventually recede and properties will be restored, but the impact will be felt for years to come.

To rebuild and restore businesses after an event like this involves time, effort and a good strategy. When it’s time to file a claim, having the right strategy will relieve much of the financial burden to your business. Coverage for the property damage may involve FEMA, Commercial Insurance, and other forms of aid. Maximizing recovery from all applicable sources is a daunting task, especially in the aftermath of catastrophic events. This is why informed policyholders turn to RWH Myers.

Just like the rebuilding and recovery effort itself, the financial recovery requires a team approach, but involving the right team is imperative. There are always those looking to take advantage of a disaster, so be cautious of who you hire for any service. It is always best to work with people you can depend on and trust. It is almost impossible to completely prepare for a disasters like this, but when it comes to preparing your claim, involving an experienced team will make a huge difference in both the process and the outcome.

The partners at RWH Myers have been through every named storm in the last three decades-including Allison, Ivan, Katrina.  We know how to accurately measure your losses, prepare your claims and recover what you deserve. Recovery may not come easily, but with the right team, it will be easier on you and your organization.

If you are in need of financial recovery assistance - including the preparation of insurance and FEMA claims related to this event - please contact the specialists at RWH Myers.  We are independent and devoted to the policyholder.

For more helpful information or to contact us visit- www.rwhmyersinsights.com.

By: Christopher Hess | January 26, 2015

Business interruption (BI) losses are among the most confusing types of claims in the insurance industry. As claim specialists, we are often asked for a “checklist” filled with action items for when a loss occurs. A “checklist” isn’t practical because there are too many variables and “if/then” scenarios to map out. When you have a significant property damage and business interruption claim, only experience can guide the way to a fair recovery. 

However, there are actions that can be taken ahead of a loss to ensure you are prepared. The following seven items represent such a “checklist.” It will not only help with your next loss but can have an immediate benefit to your risk management program.

1.    Prepare accurate ratable business interruption values 
The annual ritual of preparing the business interruption worksheet is often treated as an administrative nuisance.  It should be looked at as an opportunity to accurately account for the insurable risk for which you pay your premium and to accumulate annual values for future trending. 


The worksheet provided by the insurance company is woefully inadequate to explain the nuances of most businesses. Go beyond the worksheet and explain your business more completely to underwriters. For an effective BI values methodology, solicit help from the specialists, such as an experienced forensic accountant. The results will be appreciated by underwriters and should translate into more appropriate coverage and possibly a more favorable rate. Once a system is in place, accuracy, consistency and efficiency should be improved. 


2.    Analyze exposure scenarios and calculate MFL and PML 
Once the ratable BI values are calculated, policyholders should explore realistic loss scenarios. The BI value is an annual number that does not factor in real-life responses that would generally mitigate a claim. To get to the actual exposure to risk, companies should determine the maximum foreseeable loss (MFL) and probable maximum loss (PML) measurements. The MFL measures a “worst case scenario” in which all of the loss-control protections fail. The PML is the more realistic loss scenario, in which mitigation systems work and contingency plans are executed properly. In both cases, the property damage and business interruption effects would be calculated as if they had occurred. 


Loss scenarios should be postulated in detail, e.g. by location and by occurrence, considering all factors. These numbers should not be measured by simply applying a daily “BI rate” to an engineered loss period. It is more realistic to prepare as if presenting a claim, exploring all “what if” possibilities. Insurers may offer some assistance in this process, but remember, their version will be from their perspective. As with any claim, you should always prepare your own scenarios and your own calculations according to your understanding of your operations. An independent forensic accountant will have prepared claims just like your scenarios and would be able to accurately value the losses. 


3.   Analyze contingent risks 
Concurrent with the MFL and PML analysis, you should work to understand contingent risks to your business. Knowing what your suppliers’ and customers’ exposures are is important. Policyholders should involve leaders in operations, procurement and sales to help identify contingent exposures. If you have a sole supplier, your contingent exposure may be greater than anticipated and should be examined. 


It is important to understand how your current policy language would respond to the contingent loss scenarios you’ve identified. For example, if suppliers in your policy are referred to as “direct supplier,” make sure you understand how this would be interpreted in a claim. If “direct” means only those suppliers with whom you have a direct contract, and an indirect supplier, i.e. a second-tier supplier, has a loss that affects you, would you be covered? These scenarios should be discussed with your broker and underwriter to ensure your policy will respond as expected. 

Once the values and scenarios are updated, you will be better able to make informed decisions about your insurance coverage, limits and terms. 

4.    Business interruption vs. extra expense 
Another common discovery from performing an exposure analysis is which type of time element coverage is the best risk transfer solution. Considering each location, if the risk is a lost of sales, BI would cover the lost earnings. If sales are not the risk or they can be sustained at an extra expense, extra expense coverage would be more appropriate. If sales are at risk but can be mitigated to the degree contingency measures are enacted at an additional expense, it’s a combination loss exposure. 


It’s of value to risk managers to know what the exposure truly is because, if an exposure can be covered by extra expense coverage, it may eliminate or reduce the need for BI insurance. For example, if you are a distributor with multiple warehouses whose inventory is insured at selling price, what’s at risk? If you have alternative space or can quickly secure temporary space, the likelihood of experiencing a sales loss that exceeds the sales value of your lost inventory is remote. How much BI coverage should you buy vs. extra expense? Exploring your loss scenarios and subsequent contingency plans would allow you to better quantify your risks and select the option best suited to your needs. Extra expense is a more “tangible” risk than BI, making it easier for underwriters to rate, and it generally will cost less. 

5.   Gross earnings, gross profit and business income 
The names are different, but the intent is the same – to protect earnings lost because of damage or loss of use of insured property. The history of each of these forms would take a separate paper to detail, but, in a nutshell, gross earnings is a form commonly used in the U.S. with a basis in manufacturing risks, while gross profit is used throughout the world and has its basis in mercantile operations. Business income is the term used for the current ISO forms. Today, all forms have been modified to accommodate almost any business — however, there are some situations where one form may be preferable. The terminology and the mechanics of calculating business interruption loss varies among the forms, but the answer should be the same, regardless. 


The exception to this has to do with the period of indemnity — the gross profit form is usually limited to a specific time, while gross earnings will continue until repairs are (or should be) completed with “due diligence and dispatch”; there is the ability to add an extended period to recover sales. It is important to make sure the form you have would cover your potential loss period. For example, if you have a manufacturing company with specialized production equipment that have long lead times to replace — longer than the period that a gross profit form would cover — you should probably have a gross earnings form. If you do not see a scenario that would exceed the gross profit period and you cannot accurately predict an extended period required to add to gross earnings, the gross profit might be a better option. If there isn’t any scenario that would create a loss that exceeds the gross profit period of indemnity and you are comfortable that you can cover that time to recover sales, than either form would work. 


There are new options that allow you to pick which form you would like to use up until the closure of a claim — these forms eliminate the need to determine which form is right for your business. Just make sure you have a form that will cover your worst-case scenario. 

6.   Professional fees coverage 
Most policies now include professional fees coverage. Insurers recognize the need for dedicated claim preparation experts and are willing to pay for it as part of the claim. Often, this coverage is subject to limits that can be negotiated. If you are not familiar with this coverage or do not have it, you should discuss with underwriters. For the most part, this coverage can be included at some level just by asking. The benefits of having specialized claim preparation experts available as a resource for a claim can make the difference between a successful claim and a headache. 

7.  Organize your claim team 
In addition to forensic accountants, a claim may include forensic engineers, attorneys and others. It is a good idea to know those you want to use before needing their services. Meet with the various providers beforehand and select those that fit best for your organization. Typically, paperwork associated with hiring someone can be completed before needing their assistance (i.e. non-disclosure, purchasing, W-9, etc.) so that if something happens they can begin work immediately. Additionally, there may be an opportunity for the provider to help with reporting issues on business interruption values. 

While no business wants to suffer a loss of earnings, the more prepared you are the better the results will be. The steps shown above may take years to fully develop and should be evaluated annually to account for changes to your business. 

If these recommendations are incorporated into your insurance program, there’s no need for a claim checklist. Your risk management team will be prepared for any worst-case situations with the best-case solutions.


Published 1-26-15: InsuranceThoughtLeadership.com

Category: Insights 

Tags: Business Interruption