2015 IFAA 6th Educational Conference

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2 2015 IFAA 6th Educational Conference Catastrophe Claims Focus on Latin America Claims Handling Lessons from Hurricane Odile A Forensic Accountant s Viewpoint Roberto Quintana CPA, CFF, CFE Juan E. Lopez-Santini CPA, CFF, CFE Miami, FL 19 May 2015

3 OUTLINE HURRICANE ODILE DOL Sept 15, Quick Facts & Figures Claims Handling Old & New Lessons Hurricane Odile A Forensic Accountant s view 3

4 Quick Facts about Hurricane Odile In 2014 Hurricane Odile goes into the record books as the strongest tropical cyclone on record during the modern recordkeeping era for Mexico's Baja California peninsula. The September 14-15, 2014 Landfall was at a strong Category 3 storm made a direct hit on a 20 mile (32 km) stretch of coast line between Cabo San Jose and Cabo San Lucas The hurricane force winds reached past the city of La Paz, Mexico or 130 Miles north of Cabo San Lucas. 4

5 Landfall of Hurricane Odile 5

6 Track of Hurricane Odile 6

7 Hurricane Odile 6 th Most Expensive Pacific Storm in Eastern Pacific Costliest Known Pacific Hurricanes Rank Storm Season Cost (2014 USD) 1 Manuel 2013 $4.25 billion 2 Paul 1982 $3.81 billion 3 Iniki 1992 $3.03 billion 4 Beatriz 1993 $2.78 billion 5 "Mexico" 1959 $2.27 billion 6 Odile 2014 $1.22 billion 7 Octave 1983 $1.21 billion 8 Agatha 2010 $1.19 billion 9 Aletta 1982 $1.12 billion 10 Norman 1978 $1.08 billion List of Pacific hurricanes: Weather Channel 7

8 Claims Handling Accounting Lessons - Hurricane Odile I. Old Lessons Re-Learned II. New Lessons 8

9 Claims Handling Accounting Lessons - Hurricane Odile I. Old Lessons Re-Learned: A. Wide Area Damages (WAD), Loss of Attraction & Denial of Access Effect on B.I. B. Continued Undervalued Business Interruption (B.I.) Declarations C. Indemnity Period Repairs - Early Bird gets the worm! 9

10 Wide Area Damages - Denying Access & Delaying Recovery 10

11 San Jose de Los Cabos International Airport Damages Limited Reopening Oct 8,

12 Loss of Attraction - Some Beach Erosion 12

13 Loss of Attraction - Beach Erosion But Not All Hotels 13

14 Claims Handling Accounting Lessons - Hurricane Odile A. Wide Area Damages Denial of Access & Loss of Attraction 1. Wide Area Damages (WAD) and the resulting Loss of Market and Denial of Access continues to be a material adjustment issue for Business Interruption Claims that, although evident, insured s resist to accept as a policy deduction when the accounting numbers show otherwise. 2. Loss of earnings due to WAD damages are certainly mixed into the post event loss of earnings but it is still difficult to separate from covered losses. 3. There is certainly a negative effect over earnings in most insured s earnings due to Denial of Access, WAD, Loss of attraction/market. This effect can observed in the following case file 14

15 Claims Handling Lessons from Hurricane Odile Loss of Attraction Valuation (Case File of Hotel X) CLAIMED B.I. Vs. DOCUMENTED VALUES - LOSS OF ATTRACTION ADJUSTMENT Hotel X, Cabo San Lucas, México Hurricane Odile Loss, D.O.L. September 15, Actual Odile Case. Values & Names changed to protect confidentiality. Values Shown are proportional to those in Case file. Claimed Values for Business Interruption by Third Party Claim Preparation Service - Loss/(Excess) End Date Property Management Rental Program Beach Club Spa Bar Extra Costs/ & Other Savings Total All Depts. x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ 30-Sep-14 82,304 16,419 35,470 25,782 2, , Oct-14 61,161 91,012 34,884 24,251 (723) 0 210, Nov-14 42,208 93,222 9,856 (6,027) 2, , Dec-14 (21,414) 82,159 6,071 (14,450) 1, , Jan Total 164, ,811 86,280 29,556 5, ,248 15

16 Claims Handling Lessons from Hurricane Odile Loss of Attraction Valuation (Documented Values) End Date Claimed Values for Business Interruption by Third Party Claim Preparation Service - Loss/(Excess) Property Management Rental Program Beach Club Spa Bar Extra Costs/ & Other Savings Total All Depts. x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ Total 164, ,811 86,280 29,556 5, ,248 End Date QLDG's Results of Documented Business Interruption Value & Values Accepted by Insured Property Management Rental Program Beach Club Spa Bar Extra Costs/ & Other Savings Total All Depts. x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ 30-Sep-14 (21,787) 11,639 16,693 (4,239) 0 1,632 3, Oct-14 26,023 77,872 35,278 5,810 0 (11,525) 133, Nov-14 4,376 60,395 23,656 (3,742) 0 20, , Dec-14 (10,650) 73,737 17,504 1,799 0 (44,504) 37, Jan-15 (18,689) 16,765 10,303 (1,566) 165 2,102 9,080 Total (20,727) 240, ,435 (1,939) 165 (31,388) 289,954 Accounting Differences Documented to Claim Ratio - % 51% Effectiveness of QLDG's Accounting Review of Claim 49% 16

17 Claims Handling Lessons from Hurricane Odile Loss of Attraction Valuation Effect of Loss of Attraction/Market CLAIMED B.I. Vs. DOCUMENTED VALUES - LOSS OF ATTRACTION ADJUSTMENT Hotel X, Cabo San Lucas, México Hurricane Odile Loss, D.O.L. September 15, End Date QLDG's Results of Documented Business Interruption Value & Values Accepted by Insured Property Management Rental Program Beach Club Spa Bar Extra Costs/ & Other Savings Total All Depts. As A % of Total Accumulated as a % of total x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ 30-Sep-14 (21,787) 11,639 16,693 (4,239) 0 1,632 3,938 1% 1% 31-Oct-14 26,023 77,872 35,278 5,810 0 (11,525) 133,458 46% 47% Note 1 30-Nov-14 4,376 60,395 23,656 (3,742) 0 20, ,592 36% 84% 31-Dec-14 (10,650) 73,737 17,504 1,799 0 (44,504) 37,886 13% 97% 31-Jan-15 (18,689) 16,765 10,303 (1,566) 165 2,102 9,080 3% 100% Total (20,727) 240, ,435 (1,939) 165 (31,388) 289, % Accounting Differences Documented to Claim Ratio - % 51% Effectiveness of QLDG's Accounting Review of Claim 49% Note 1: Hotel Re-Opened on Oct 15, 2014 with enough rooms and All Services to meet seasonal demand of Oct All repairs where finished by October 31,

18 Claims Handling Accounting Lessons - Hurricane Odile Proximate Cause Perhaps the most important and ignored concept As defined on Interruption Insurance. Proximate Loss Issues (Gordon Hickmott): it was the underwriters intention for the loss to be met up to the level that it would have been, had the damage been restricted to the insured s own property at the premises. What insurers did not intend to pay for was the aggravation of the loss by virtue of the wide area damage which might, extend the indemnity period and/or accentuate the diminishment of turnover once reinstatement was complete or during periods when partial trading was possible 18

19 Claims Handling Accounting Lessons - Hurricane Odile Old Lessons Re-Learned - B. Declared values are Still Under Reported Application of Average Clause 19

20 Claims Handling Accounting Lessons - Hurricane Odile B. Declared Values & Application of Average Clause - Declared B.I. values continue to be widely under-reported by insureds which is leading to material Average Clause/co-insurance adjustments. - On the other hand, the Average Clause continues to be a very useful tool in keeping partial losses within an equitable adjusting range by keeping the insured s B.I. loss expectations within reasonable values/trends. - Nevertheless, about 50% of QLDG s Odile case files showed a range from 40 to 60% insurance adequacy. (See the Following Actual Odile Case File for Hotel Y) 20

21 Claims Handling Accounting Lessons - Hurricane Odile B. Declared Values & Application of Average Clause - In the 2012 survey findings by Vericlaim s Director Damian Glynn presented to the Chartered Institute of Loss Adjusters (CILA) shows that a survey of insurance industry professionals indicated that about 40% of policies are underinsured with 55% average level of adequacy. - CILA s survey findings also state that 52% of all clients surveyed either misunderstood the Gross Profit Definition or had insufficient explanations. - QLDG s cases experienced about a 40 to 60% level of adequacy. History repeats itself in Mexico. - CILA s 2012 Survey is in line with QLDG s 2014 Odile findings, see next example. 21

22 Claims Handling Accounting Lessons - Hurricane Odile Business Interruption Calculations - Effect of Average Clause Hotel Y- Cabos Mx. Odile Hurricane, Hurricane Odile F.D. P. 15 de September 2014 Source: Schedule 2 Schedule 4 Schedule 3.1 Waiting Period Co-Aseguro Infraseguro Sch % 7 10% 58% Mes Loss of Sales Less Savings in Variable Costs & Expenses Sales Less Variable Costs/Expenses Actual Odile Case. Values & Names changed to protect confidentiality. Values Shown are proportional to those in Case file. Case Not Closed at time of Publishing Labor Savings Gross Business Interruption Value Before Policy Adjustments Deducible BI Less Deductible Deduction due to 10% Windstorm Sharing by Insured BI Less Deductible and Winstorm Sharing Average Clause Deduction BI Value Net of Deductible, Sharing and Average Clause Deductions Official Exchange Rate for Month BI Value Net of Deductible, Sharing and Average Clause Deductions MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN por US$ US$ US$ Sep-14 13,703,006 (5,986,407) 7,716,599 (73,651) 7,642,948-3,343,790 4,299,158 (429,916) 3,869,243 (2,244,161) 1,625, $ 122,943 $ 122,943 Oct-14 22,798,746 (9,960,046) 12,838,700 (238,282) 12,600,418 12,600,418 (1,260,042) 11,340,376 (6,577,418) 4,762, $ 354,812 $ 477,755 Nov-14 23,523,011 (10,276,454) 13,246,557 (116,146) 13,130,411 13,130,411 (1,313,041) 11,817,370 (6,854,074) 4,963, $ 360,529 $ 838,284 Dec-14 27,968,121 (12,218,381) 15,749,740 (81,423) 15,668,317 15,668,317 (1,566,832) 14,101,485 (8,178,861) 5,922, $ 402,407 $ 1,240,690 Jan-15 32,383,924 (14,147,505) 18,236,419 (166,176) 18,070,243 18,070,243 (1,807,024) 16,263,219 (9,432,667) 6,830, $ 460,236 $ 1,700,927 Feb-15 33,368,119 (14,577,468) 18,790,651 (122,976) 18,667,675 18,667,675 (1,866,768) 16,800,908 (9,744,526) 7,056, $ 471,608 $ 2,172,534 Mar-15 35,630,741 (15,565,936) 20,064,806 (152,355) 19,912,451 Note 1 19,912,451 (1,991,245) 17,921,206 (10,394,299) 7,526, $ 493,804 $ 2,666,338 Total 189,375,668 (82,732,196) 106,643,472 (951,009) 105,692,463 (3,343,790) 102,348,673 (10,234,867) 92,113,806 (53,426,007) 38,687, $ 2,666, % 56.31% $ 7,284,257 $ ( 230,452 ) $ 7,053,805 $ ( 705,381 ) $ 6,348,425 $ ( 3,682,086 ) $ 2,666,338 Cumulative Value Note 1: Soft Opening on March 15, 2015 with minor repairs pending at this time. Fully Repaired by April 1,

23 Claims Handling Accounting Lessons - Hurricane Odile B. Declared Values One Solution: Improve Understanding & Increase Adequacy of Declared Values QLDG advocates the increased use in the Latin American Market of the BI Worksheet during the initial underwriting stage and as part of the underwriting correspondence. Advantages of using a B.I. Worksheet: 1) Improve Understanding - Includes a step by step guide and a set of instructions on how to Estimate a B.I. value for different industries. 2) Form may even included options for a Co-insurance factor (today known as leeway ) to avoid the uncertainty of the forecasting process 3) The B.I. worksheet, not a 100% solution, but combined with sound legal advise it is another tool to bridge the Insured s understanding gap and maybe increase premium dollars for the market. 4) A powerful tool, in the claim s adjusting process, by providing insight as to how the insured declared the B.I. values 5) May add a layer of protection to broker/agent/consultant and even local insurance carrier against professional/errors and omissions liability claims. 23

24 Claims Handling Accounting Lessons - Hurricane Odile Declared Values One Solution: Improve Understanding & Increase Adequacy of Declared Values Disadvantages of the BI Worksheet: 1) Additional liability as insured s with limited time to prepare declaration may ask broker to fill it out. 2) A BI Worksheet prepared without proper legal and the claim s professional guidance may lead up to other misunderstandings by insured s 3) Selective use may lead to claims by those that suffered a Average Clause Adjustment and were not provided with the BI Worksheet guidance when declaring their values. 24

25 Claims Handling Accounting Lessons - Hurricane Odile C. Indemnity Period Repairs - Early Bird gets the worm! Even after all of the CAT Planning - Limited Resources continue to be a significant problem for timely repairs. I. Imported foreign resources are an option but many Odile insureds utilized local resources with excellent results. In this CAT, Insured s that started repairs immediately by mobilizing & housing the Mexican labor force on site, were able to secure the limited skilled labor pool and materials leading to quicker repairs, with significantly shorter indemnity periods than those that did not. II. Ventures between Hotels and Mexico construction companies (arranged Prior to Odile) proved very cost and time effective than the use of foreign based imported resources or other locally arranged after the storm. 25

26 Claims Handling Accounting Lessons - Hurricane Odile New Lessons Learned from Odile Case Files 26

27 Claims Handling Accounting Lessons - Hurricane Odile New Lessons Learned from Odile Case Files: I. QLDG has seen increased intervention of more Public Adjusters / Assessors & Claim Preparation accountants that in past years. 27

28 Claims Handling Accounting Lessons - Hurricane Odile New Lessons Learned from Odile Case Files: II. A great number of Hotels in Cabo are Not only Hotel operations but Time Share type businesses, 1) What are we paying for in a Time Share loss of sales/bi Value? 1) Lost Hotel Room night Sales? 2) A Sale of an Asset with a limited number of units and time availability? 3) A combination of both? 2) Fixed cost do continue but what about Net Income / Profit from the sale loss of a Time Share? Is the net income really Lost or maybe delayed? 3) Salvage value for indemnified Time Share sales lost during BI Period? 28

29 Claims Handling Accounting Lessons - Hurricane Odile New Lessons Learned from Odile Case Files: III. Odile had larger Number of Beach Front High Value Homes, Restaurants, Boutique Hotels with special circumstances. 1. Increased proportion of insured beach front properties in Cabo valued at over US$ 5 Million which are owned by foreign investors via Fideicomisos or Trusts so as to comply with Mexican Law. 2. Use of Fideicomisos or Trusts by Foreigners (to legally own beach front properties) increases repair cost by 16% (Trusts in Mexico are not VAT Rated). 3. Adjusters saw an increased number of US Insurance Policies working alongside a local policy to Insure High Priced Homes and Boutique Lodging that included Loss of Rents / Loss of Use and claim preparation coverages. 4. Increased numbers of Claim Preparation services than in other CATs. 29

30 Claims Handling Accounting Lessons - Hurricane Odile New Lessons Learned from Odile Case Files : IV. Construction Methods in Baja California have not followed the Old Lessons of Hotels in the Post Caribbean CATS of the early 2000 s 1) Concrete is King but some seemingly modern structures clearly lacked the following of Hurricane Codes for windows and doors causing increased repair times. 30

31 Tourist Hotel (MP) - In San Jose de Los Cabos 31

32 Claims Handling Accounting Lessons - Hurricane Odile IV. Construction Methods in Baja California have not followed the Old Lessons of Hotels in the Post Caribbean CATS of the early 2000 s 2) Even Modern Structures in Cabo suffered surprisingly serious damages. Is there a need for increased risk inspections to meet the hurricane risks even for the most modern structures? (See Next Set of Photos) 32

33 Modern Business Hotel in San Jose, Cabo Finished in

34 Same Hotel Hurricane Odile in

35 Same Hotel Hurricane Odile in 2014 Rear View 35

36 Questions? Thank You for your attention