Calculating business interruption losses following a natural catastrophe ("CAT") has always been as much of an art as a science, requiring forensic accountants to use their education, experience and training to resolve the complexities inherently present in quantifying business interruption ("BI") losses. Adding a global pandemic into the mix, overlaid with an extremely busy Atlantic hurricane season has only further complicated matters; creating what one may refer to as "the triple threat" [i.e. pandemic, natural catastrophe, and interruption of business]. This article will briefly touch on some of the challenges which seem to go hand in hand with this triple threat of pandemic, CAT and BI.
Since the 13th of March this year, I have been working from home. This has become the so- called "new normal" for many of us and, putting the usual distractions aside (i.e. kids, pets, and the rare internet service interruption "scare") it has certainly been manageable, albeit not necessarily always ideal.
Living in Florida, though, there is a familiar "old normal" reality that starts to show its face here every June when "hurricane season" begins, and it typically makes a full-blown appearance as September and October roll in with increased storm activity. Hurricane season means the rush for bottled water, gasoline, batteries and propane tanks seems to be constantly looming around the corner.
As I write this article (and in true form to this most abnormal year) not only has the last planned storm name for this hurricane season ["Wilfred"] already been used, but we have already seen the Greek alphabet names coming out of the woodwork, with Hurricane Delta making landfall just south of Cancun, and from there possibly moving across to the Louisiana shores. These Greek names last made an appearance in 2005. and many of us remember that fateful season with hurricanes Katrina and Wilma.
This already busy Atlantic hurricane season has possibly entered its busiest period now, likely bringing a surge in BI loss incidence. The number of COVID-19 cases are escalating in the Northern hemisphere again as fall approaches, bringing back restrictions that had been lifted. The outlook in the Southern hemisphere is not much better. Last, but not least, the recently published findings of the UK's Financial Conduct Authority ("FCA") BI test case, will (now more than ever during this pandemic) cause BI policy wordings to be very closely scrutinised, and potential exposures unavoidably assessed.
This triple threat of the pandemic, CAT and BI is very real. All the usual complications of a BI loss following a major catastrophe, where utilities / access restrictions, travel complications, scarce resources and data limitations - now coupled with the era of social distance - will inescapably bring added complexity into any BI measurement, large or small.
So how do we handle this so-called "triple threat"?
What specific lessons does the past hold which we can apply today? Can we truly rely on the "old ways" to deal with this "new normal"?
Historical techniques used to assess BI losses may need to be reconsidered, especially as, absent clear sublimits, indemnity periods under Gross Profit forms could reach the 12-month mark. The use of competitor data as a benchmark for projections, for example, may give less insight than usual to real trends, since individual companies' managerial decision making, financial resilience and information technology ("IT") capabilities may differ hugely between competing entities in this ever-increasing virtual world. In that sense, wherever possible, one might look to use other related business locations that were not impacted by the catastrophe, directly or indirectly, as a proxy for the loss location.
When it comes to Contingent BI losses amidst a pandemic and a natural CAT environment, concurrence is likely to increase the need for very specific segregation within the calculations, even with sublimits in play.
Looking to the future, perhaps to technology as a solution, is certainly an enticing option. The vast majority of insurers and reinsurers have, however, already expressed concerns about using very limited and untested technology like Artificial Intelligence ("AI") for the measurement of small claims (at the best of times - before the pandemic).
One obvious concern is that relying upon arcane models that integrate AI may presently not provide meaningful accurate outputs, given the current limited inputs into such models. For example, practically any model built from AI will struggle to truly contemplate a global pandemic and its associated impact on an individual business, local economy, regional and global business environments, supply chain, etc. Furthermore, conflicts will manifestly arise as different algorithms employed on base data sources will inevitably yield different BI measurement results. Will the courts then decide whose AI algorithm is better, the one employed by insurers or the one possibly employed by insureds?
One immovable truth is that, under the current circumstances, each traditionally underwritten BI loss still needs to be uniquely assessed, and your solution-driven trusted advisors at MDD are here to help you navigate your way through these trying times.
If you wish to engage in stimulating and enlightening discussions regarding catastrophes, the pandemic and BI losses, join us for our CAT-tober panel discussions every Tuesday this month. Click here for more information and to register.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.