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Is It Time to Revisit Your CBI Exposures?
Jeff Esper
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 and an expert in valuing business interruption exposures, the following six important CBI questions:
- 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 sublimated 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.
Insights Worth Sharing
Happy Holidays from RWH Myers & Company
Making a business interruption claim is more than just an accounting exercise. It requires a good strategy, a thoughtful process and perhaps most of all, patience. These lessons come from experience and the team at RWH Myers has earned it from decades of preparing BI claims. Though this topic is of the philosophical nature, it is just as important as the details behind a business interruption calculation. So let’s dive in and see what you really need to make a BI claim. Strategy Every loss is different. You can’t apply the same game plan and the same approach to every claim. You have to assess the situation and all its parts to devise a specific workable strategy. Experience will help ensure your strategy is appropriate for the situation, but the claim will take on a life of its own. The initial loss assessment is derived from the loss information such as what happened, the timeline of events, the impact to operations and how long it will take to get back to normal. As forensic accountants, we will look at the entirety of the situation and dissect it from every angle to figure out the full scope of loss and then determine the best approach to measuring and supporting the claim. We will also anticipate how the claim will be adjusted and plan for arguments against the claim. Taking the time to develop a proper strategy will pay off at every stage of the claim process. Process Once you understand the situation and have designed an effective strategy, you can lay out a process to get to the desired result. The process starts off with identifying and assembling the team to execute the plan. The claim will require data from various sources and input from key internal experts to provide insights as to the impact on operations, both upstream and downstream. The process also includes managing claim adjustment, from setting the timeline to handling requests for information. During the process, your claim preparer will work to keep all phases of the claim moving forward whether with data gathering or insurer feedback. Claims tend to start out with a high level of attention, but it is common to lose momentum. Simply put, a well-defined process will keep the claim moving, limiting distractions and roadblocks. Patience Patience doesn’t equate to conceding to a lengthy and arduous process. It’s just the opposite. By definition, it means, “quietly and steadily persevering or being diligent, especially in detail or exactness.” It is important to understand that certain parts of the claim take time to develop, and that time is critical to ensuring a thorough and well thought out claim presentation. For example, taking your time in the beginning of the process to lay out the foundational elements of the claim will avoid obstacles that may delay claim settlement and the amount recovered. It’s best to set expectations early and commit to the process. Again, practicing patience will expedite the claim process and improve the outcome. You can rely on the experience of your forensic accounting team to lead that effort. So, you see, it’s not all about the numbers. There is more to the intangibles than you may have thought. Every claim has its own unique challenges. You should be prepared for anything and everything. Again, preparing a claim is just as much strategy, process, and patience as it is the technical elements of claim preparation.
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