Preparation is key

How would your organisation respond to a business interruption?

It's important that organisations have a well-designed and comprehensive insurance program that meets their specific needs.

By completing a thorough review of your insurance contracts and coverage, it can enable organisations to see what planning and preparation needs to take place. An insurance health check often involves a review of the relevant declared values, policy triggers and coverage, periods of
indemnity, limits of liability, key sub-limits and overall policy wordings.

What's concerning is that many businesses do not appreciate that their insurance may not be appropriate and will fail to transfer risk as expected. As an example, this can occur if businesses consciously decide to insure below the full replacement value of assets to save on insurance premiums, or because they think a disaster could never happen to them.

Many businesses actually believe they are adequately covered, until of course it's too late. The whole purpose of business insurance is to put you in the position you would have been if the damage had
not occurred.

Knowledge and understanding

"A good litmus test to ensure your cover is adequate is - how would your organisation respond to a major interruption that caused your business to stop trading?" says Luke Stratford, Principal - Risk Accounting, Aon Global Risk Consulting. "Are you confident that you would receive the right insurance recovery from insurers, based on the existing business interruption figures supplied to your insurer?"

Having the right business insurance is a good start, however when a loss occurs the insured is required to prove their loss, a significant challenge as a result of having to meet specific insurance industry requirements.

In such a 'post loss' situation it is crucial that the insurance claim is prepared accurately, utilising the full extent of the insurance coverage, and submitted to insurers in a timely manner, to ensure cash flow is protected and the business is restored to 'normal trading' as soon as possible.

To assist with this process Aon Risk Accounting's team of forensic accountants help clients understand their business interruption exposures better, to address these exposures effectively and efficiently, and when a loss occurs, are available to assist with the timely and accurate preparation of the insurance claim.

The following DuluxGroup case study highlights these services in action.

The client

DuluxGroup is a manufacturer and marketer of products that protect, maintain and enhance the spaces and places in which we live and work.

From household rooms transformed by the latest designer colours, to the ripe tomatoes in the garden, to the coatings that protect landmarks, such as the Sydney Harbour Bridge; DuluxGroup products are at work. DuluxGroup brands have been woven into the fabric of the communities where we operate, helping consumers to live better and more comfortable lives.

Consisting of four business segments, DuluxGroup employs approximately 2,500 people in Australia, New Zealand, Papua New Guinea, South-East Asia and China.

Background

Following the demerger of DuluxGroup from Orica in 2010, the separate listing of DuluxGroup presented challenges in relation to the placement of the Property Damage and Business Interruption insurance.

DuluxGroup was moving from a very large global insurance program incorporating hundreds of sites and thousands of assets to a standalone program incorporating approximately 100 locations.

The right framework

Preparing for life post de-merger, the challenges in relation to the Property and Business Interruption program were to maintain the coverages and insurance premium spend. In order to achieve this it became imperative to understand the risks involved and then to structure a tailored program that provided appropriate limits and breadth of coverage - at a Total Cost of Insurable Risk that was acceptable to the Board.

In consultation with the expertise of the Aon broking team, Aon identified a framework to identify the risks for the renewal incorporating valuations, physical risk surveys and a business interruption review.

In particular the business committed to building a model, in collaboration with Aon Risk Accounting, which quantified the potential business interruption loss exposure, based on a Maximum Foreseeable Loss scenario.

The main objectives were around maintaining cover, preventing unintended retentions - as well as avoiding volatility in cash flow, balance sheet and share price valuation.

Planning for any scenario

Less than six months after the placement of the property and business interruption insurance policies, the Queensland floods severely damaged DuluxGroup's main paint production plant at Rocklea in January 2011.

During the incident the flood water levels reached a height of two to three metres across the Rocklea production site. The ground floor of the office building, the lower factory level and the lower levels of storage in both the raw materials store and distribution centre were water-affected.

The damage was primarily confined to plant and equipment, fit out, work in progress and stock on hand that suffered immersion - whereas the structural integrity of the buildings and warehouse was sound.

The upper floor of the factory, which is where the majority of paint manufacturing takes place, was not water-affected, and more than 80 per cent of the stock in the distribution centre was useable. However the site still had no external power and the internal power distribution infrastructure had also been affected by the floods.

The DuluxGroup project management team were involved in the clean-up of debris, as well as reinstating salvageable mechanical equipment and distributing power to key areas.

Solutions focused

Aon mobilised its resources including broker, placement, claims and Risk Accounting (Aon's own forensic accounting practice), to advise on coverage, loss mitigation and complex claim preparation.

The Risk Accounting team were on site when access to the damaged site was authorised. The team immediately went to work to prepare a claim reserve, define a claim process, locate the data that needed to be captured and to identify the people and resources required to proactively prepare the business interruption claim.

Through the claim preparation process regular progress claims were submitted to insurers to ensure that the cash flow needs of the business were being addressed, and that significant mitigation steps were being undertaken, funded through the insurance recovery.

The business interruption model built for the purposes of renewal was used as the basis for the claim recovery template.

Delivering results

Aon provided strategic policy advice in negotiations with Insurers, including the knowledge and strong industry relationships of Aon's Chief Claims Officer, Mark Ronan.

The work of the Claims team included:

  • Attending meetings with the Insured (DuluxGroup) on a regular basis
  • Delivering multiple progress payments to fund business
  • Working with the Insured to meet its reporting deadlines and confirmation of recoverable proceeds from insurers for financial year end
  • Supporting the funding of loss mitigation strategies
  • Taking a pragmatic approach to resolving the claim, including appropriate escalation
  • Management of disparate insurance panel to avoid fracture and unnecessary delay.

 

 

 

For more information please contact:

Luke Stratford
Principal - Risk Accounting
Aon Global Risk Consulting
t: +61 3 9211 3297
luke.stratford@aon.com

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