The FAS Focus – Edition 4

In our first article, Terri Adams – Senior Manager in our London office, looks at how recent examples of cyber incidents are focusing attention across a range of insurance issues – including policy response issues, the adequacy of policy limits and the increased forensic analysis required in assessing claims.

In our second article, Domenic Quartullo, Litigation Partner in our Sydney office, looks at situations when an entity’s annual financial statements are not “fit for purpose” or sufficient when seeking to satisfy the varied objectives arising in commercial and other dispute proceedings.

With this issue we also welcome Jeffrey Cornwell who has been appointed head of Forensic Advisory Services in the U.S. as part of our expansion of services in the Americas.

Click here to download The FAS Focus – Edition 4

The FAS Focus – Edition 1

Welcome to the first edition of the FAS Focus. As FAS expands around the globe, we are merging our client updates and newsletters into one international update, the “FAS Focus”. The FAS Focus will provide an insight into the fascinating world of forensic accounting and feature analysis on topical issues and insights from case studies. Our experts will cover topics from across our practice areas which include insurance, dispute resolution, financial investigations, business valuation and corporate advisory.

Click here to download The FAS Focus – Edition 1

 

Rebuilding Christchurch


Overview
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Over 90% of claims from the Christchurch quakes have been settled, but that still leaves a significant number of losses unresolved.

It is over five years since the first serious earthquake occurred in Christchurch, New Zealand, and there have been nearly 14,000 aftershocks. The 6.3M quake on 22 February 2011 killed 185 people, destroyed much of the inner city and rendered several suburbs permanently uninhabitable. Cunningham Lindsey has been involved in approximately 30,000 claims and has surveyed in excess of 60,000 damaged properties.


  • The Challenge:

    Before the earthquakes the Cunningham Lindsey New Zealand company had 185 staff. We lost both Christchurch offices during the earthquakes, but thankfully none of our staff or their families were seriously injured.

  • The Solution:

    At the height of the earthquake response, our numbers swelled to over 550, and many of the additional adjusters came from Cunningham Lindsey in Australia, the UK, South Africa, Canada, Spain and the US. In normal times the New Zealand office has five chartered accountants. At one stage after the earthquakes we had 56 accountants on board to handle nearly 6,000 earthquake business interruption claims, dealing with customers under great stress, many with businesses and homes in ruins.

2015 Australian storms and floods


Overview
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A spate of hailstorms and cyclones caused widespread damage throughout New South Wales and Queensland during the early part of 2015, with claims reaching US$1.5bn

We worked closely with insurers and brokers to make sure policyholders received the best possible service.

We quickly mobilised local teams including technical loss adjusters, restorers, building consultants, engineers and forensic accountants to provide immediate assistance, with our 24/7 Customer Services Centre in Wollongong ensuring priority was given to the worst-affected customers.


  • The Challenge:

    After a succession of natural catastrophes, including hail storms, cyclones and floods, the damage ranged from minor water damage of homes through to total commercial building collapse and business interruption. In total, the industry received over 170,000 claims that it needed to assess and process as quickly as possible.

  • The Solution:

    Cunningham Lindsey stepped up its response, establishing Catastrophe Management Offices for each event, setting up Customer Care Teams in Melbourne, Parramatta, Adelaide and Brisbane and bringing in 20 experts from the UK, New Zealand and US, experienced in the complexities of severe storm losses, to support local teams.

Upfront work needed to arrest arising claims disputes says Richard Ward

There is an increased tendency for corporate insurance claims to be challenged with most disputes arising from a lack of understanding over what is covered by policies, according to Richard Ward, Chairman of loss adjusting firm Cunningham Lindsey.

In order to bridge the mismatch over expectations of insurance he urged buyers to do more work upfront to fully understand the coverage they have in place. Risk and insurance managers should also be open with boards about what they have, or not, covered through insurance, Mr Ward added in an interview with Commercial Risk Europe.

The ex-Lloyds chief executive also said that he expects increased M&A activity in the insurance industry to continue as the market grapples with the difficult operating environment. He said the consolidation is unlikely to result in lack of choice for insurance buyers and instead may lead to better innovation, sharing of best practices and improved service.

“It is interesting that talking to people generally in the market place there does seem to be a greater tendency to have challenges around claims…There are many factors you could argue are leading to an environment where it is getting a little bit fractious between the insured and insurer and greater challenges around claims,” Mr Ward told CRE.

These factors include increased compliance activity whereby insurers are challenging their claims department about payments and increased fraud because of economic and recessionary pressures, suggested Mr Ward.

However, he believes claims disputes are ‘nearly always around coverage and a mismatch between expectations of the coverage bought and that which has been sold’.

“Most disputes to my mind come down to a lack of understanding of what the insurer believes he or she is covering and what the insured thinks they have bought. Usually when things go wrong it is because of a misunderstanding. So transparency around policy coverage and wordings is absolutely critical. Loss adjusters do have a role to play to help the insured understand what the coverage is,” he said.
His simple advice for insurance buyers is to start the buying process early in order to allow time to read the policy in full and understand the coverage placed.
“The key to insurance, as I continually tell people, is read your policy carefully and understand exactly what your cover is,” advised Mr Ward.

Insurance buyers need to be upfront with management and boards where coverage is not in place, continued Cunningham Lindsey’s chairman.

“If you don’t do this there will be unspoken assumptions and that is a recipe for disaster. Everyone assumes you have coverage for x and it may turn out you haven’t. So you need spoken assumptions where everyone assumes you have got x coverage and you tell them yes we have got it, because you have read the policy and this is covered, or no we haven’t got it and this is why,” he said.

Moving on to the issue of growing M&A in the insurance sector, Mr Ward said he is not surprised by the level of activity and expects it to continue.

There is pricing pressure and investment return pressure with no obvious end in sight, so now is the time to carry out M&A activity to drive out cost savings, diversify your product offering and in doing so deliver top line growth. So I am not unsurprised by the M&A activity and it is likely to continue,” he said.

“We have seen a raft of deals-ACE and Chubb, Tokio Marine and HCC and XL and Catlin-that all have cost synergies as a result of the deals. They allow the firms to drive out cost and increase turnover,” he added.

He pointed out that a lot of insurers are struggling with their exposure to the P&C sector, which has seen the most significant softening, and are therefore trying to diversify into other product lines. Mr Ward is sure this is ‘some of the rationale’ behind the ACE Chubb tie up.

He believes that the proposed ACE takeover of Chubb and M&A deals more generally will not overly hamper competition in the market place and may well lead to benefits for customers.

“I think there is sufficient choice in the insurance sector so I don’t think buyers should be concerned about loss of choice,” argued the ex-Lloyds CEO.

“M&A is delivering economies of scale, pooling of expertise and maybe through that you get more innovation, sharing of best practices and better service. These are the sort of things that people will be looking for through this M&A activity, but ultimately insurers will want to improve the performance of their company,” he added.

Public – private infrastructure market moves on to firmer foundations

The public-private infrastructure insurance market has regained some of its old buoyancy in the wake of the global financial crisis, but a number of challenges remain.

Rasaad Jamie, Global Markets Editor

There is a great deal of uncertainty in the UK about the value for money represented by infrastructure projects funded by public-private partnerships (PPP) or private finance initiatives (PFI), such as the Crossrail and High Speed 2 railway projects.

The flow of PPP/PFI infrastructure projects in the UK (excluding Scotland) has more or less come to a standstill following the global financial crisis and, in particularly, the emergence of the Conservative/Liberal Democrat coalition government in 2010.

Now the re/insurance market is looking overseas for opportunities relating to these projects, particularly in emerging market regions such as Latin America, the Middle East, central and eastern Europe and Asia-Pacific, including China.

Steve Downing, a senior vice-president in broker Lockton’s London-based real estate and construction team, says the amount of PPP/PFI activity in the UK has reduced quite significantly over the past five or six year period in comparison with the 20-year period that preceded it, when there was a huge amount of investment in transport, healthcare and education infrastructure via the PFI-type model.

There is now very much the feeling in the UK that PFI, on a long-term basis, is a very expensive way of procuring these projects and all that happens is while the considerable upfront cost of a project is deferred, the money spent by the public sector over the next 25 or 30 years is significant,” he says.

The financial crisis, not surprisingly, had a significant impact on PPP/PFI infrastructure project activity globally. Mike Roberts, managing director at loss adjuster Cunningham Lindsey’s major and complex loss – construction and engineering division, says between 1990 and 2009 there were around 1,400 projects in the EU with a capital investment of €260bn ($285.33bn).

Elsewhere, Australia, Canada and a number of countries in Asia and the Russian Federation have all developed PPP programmes, with more than 300 projects in Russia alone before 2013. “The 2008 financial crisis led to a drop of approximately 40% in capital expenditure,” Roberts says.

But things are changing and the global PPP market is starting to regain some of its old buoyancy. “This is despite the fact in many developed economies, the immediate pipeline of PPP activity has dried up somewhat, as wider fiscal policy is focused on debt reduction rather than infrastructure investment. “Even in these economies, projects are still being procured,” Andrew Briggs, a partner at in the construction practice at law firm Hogan Lovells, says.

Roberts agrees. He points to the fact in the UK over the past 15 years there have been close to 600 projects with a capital value of £60bn ($93.31bn). Although much of that funding would have been secured during the first 10 years, he says there are also new opportunities emerging.

He highlights the launch of the PF2 infrastructure programme in 2012 and the suggested £1bn of new projects a year. “The PPP sector is both alive and well and, in addition, it is developing into new areas in the UK. Even the European Bank for Reconstruction and Development hosted a two-day PPP event in London only last month,” he says.

Yet the bulk of the activity in PPP infrastructure has moved to developing and emerging markets, where the PPP procurement approach is gaining wider traction. For example, Briggs says a wide range of government bodies in central Europe, Asia, Africa, the Middle East and Latin America are putting in place PPP legislation and pilot schemes.

“Notably, most global financial institutions – including the World Bank, the UN, the European Investment Bank, the Asian Development Bank and the African Development Bank – are promoting PPPs and providing support and guidance for government bodies to implement and accelerate infrastructure investment. The need is critical and it seems PPP will increasingly play a part in fulfilling that requirement,” Briggs says.

PPP infrastructure activity in the Middle East and north African (Mena) region, which was hit hard by the global financial crisis, has made a strong comeback in recent years as a result of the re-emergence of structured financing to bridge the infrastructure investment deficit created by the crisis.

Most of the previous large PPP project financings in the Mena region that have closed in recent years have tended to be in the utilities sector, normally with a large tranche of exporting credit agency financing from the Japan Bank for International Co-operation (JBIC) or the Export-Import Bank of Korea and with the offtaker’s payment obligations being backstopped by a sovereign payment guarantee.

“But these days, in addition to the utilities sector, there is now also a strong pipeline of PPP transactions in other sectors, most notably in the healthcare, education and transportation sectors,” Adrian Creed, an Abu Dhabi-based partner at law firm Clyde & Co, says.

There is also growing interest in PPP/PFI infrastructure project financing in India, China, Japan, Malaysia and South Korea, according to Colin Rose, senior underwriter and the leader of Beazley’s construction and engineering team.

The attractiveness for the insurance market of a particular PPP project, he says, depends on the governments’ attitude to investment in infrastructure for transport, healthcare and education.

Rose says PPP arrangements can differ significantly from country to country, as there are various interpretations of what constitutes a “partnership” between the private sector and government.

“Insurance brokers with PPP/PFI expertise in London are looking to bring that expertise into play for local retailers. The Beazley experience of the way PFI/PPP projects have been run has been positive, especially where we find the private partners have influence on the running of the projects and there is greater influence in the need to provide a project on time and defect free,” Rose says.

For the insurance market, what are the main challenges in terms of providing coverage and other risk management solutions to PPP/PFI infrastructure projects, as opposed to providing the same solutions to other infrastructure projects, such as those that are solely financed by either the private or public sector?

Rose says the majority of coverages are the same. “The biggest difference lies in the need to ensure all parties are covered by the insurances during construction and also into the operational phase, which can last for a period from 25 to 30 years,” he says.

According to David Hayhow, a partner in construction and engineering team at Lockton, the consideration and implications for the insurers are a little more onerous with a PPP project. “The project is often governed by a principal for whom the project is being built – a government body or department. At the same time, debt finance is being raised against the project and as a consequence the debt provider will also have requirements, which will have implications for how the insurance programme is structured because it will have to satisfy both the government party and the debt finance provider, both in the construction and the operational phase of the project,” Hayhow says.

Roberts says it is important the PPP specialist insurer or broker recognises the interests of all stakeholders and individual needs for brand protection, to avoid complications which might otherwise arise from multi-party disputes and to control costs.

“The key is the contractual matrix, which defines the parameters for asset procurement, renewal, maintenance and performance/availability and determines the financial consequences for unavailability. The financial consequences are formulaic, so the full effect of damage and repair times can be managed. The contracts are not a barrier to efficient and cost-effective reinstatement, particularly as defined roles will mean, if managed properly, the time taken to implement a solution can be reduced,” Roberts says.

“From a loss adjusting perspective, stakeholder management is a necessity as loss mitigation and innovative approaches to complex losses will require consents from several parties and often fall within the parameters of lender governance.”

Things are often done a little differently in countries such as Abu Dhabi and Saudi Arabia, according to Creed. Instead of the private sector party carrying the burden of providing all the upfront finance for the project, the host government will typically take an equity stake in the project special-purpose vehicle (SPV), thereby aligning its interests more closely with the private sector developer than tends to be the case elsewhere.

“In other jurisdictions, such as Bahrain and Jordan, it is normally the case the project SPV will be wholly owned by the private sector developer. Consequently, the extent to which a host government has a direct equity interest in a PPP project has tended to influence how the insurance requirements are crafted,” Creed says.

Traditionally in the UK, the general burden to insure is placed with the private sector partner involved in the PPP project but as the market has evolved, particularly over the past 13 years, a few things have changed in this regard. An important development, according to Nick Tidnam, counsel at Hogan Lovells and one of the most experienced lawyers in the PPP/PFI area, has been the shift from PFI to PF2.

“The guidance for PF2 has introduced a discretion for the authority granting the PPP concession to cover certain risks by way of the grant of an indemnity, rather than requiring the contractor to insure them in the market – for example, to cover material damage and business interruption during the service phase for projects with particular risk characteristics where it represents,” Tidnam says.

“In projects with a dispersed asset base such as street lighting projects, the UK authorities take the view damage can only occur to one or two street lighting poles at a time, for instance where they are damaged by a runaway truck, and so rather than insuring the replacement of all the street lights in a project, it is more cost-effective for the relevant authority to cover the cost of replacement, as that cost should not be significant,” he adds.

This development also means the state authority and the private sector contractor share the risk of rises in insurance premiums, which until not so long ago was entirely borne by the private sector partners.

“The current guidance relating to PF2 provides that the private sector contractor takes the risk of premium increases up to an agreed threshold above the initial premium and above the threshold the premium increases are shared between the private sector and the authority on the basis of 15:85. The authority has in principle at least discretion to designate the threshold at a level between 105% and 130% of the base premium. From our experience a similar general approach is used in US PPPs, although the thresholds may be set at a different level,” Tidnam says.

But while there is the perception the insurance market in relation to UK PPPs has become deeper and has developed more capacity over the past few years, the market, according to Charles Ford, a counsel at Hogan Lovells, there is still has some way to go. “For example, the PPP insurance market does not yet cover weather risk in relation to the operation of the electricity cable projects linking offshore wind farms to the shore (called OFTOs and this is something which hopefully might be addressed over the next few years as insurers become more familiar with this risk,” he says.

Risk-averse

For Paul Knowles, chief executive of construction and real estate at JLT Specialty, it is important both the broker and the insurer involved in the PPP project realise the funders are taking a real risk on these projects and therefore have a big say in the structure of the placements. “They will typically be risk-averse and therefore want wide cover and relatively low attachment points. They will also be more interested in the credit rating of the insurers and will have minimum requirements, which insurers and brokers need to be aware of.”

According to Roberts, in terms of the insurance of a PPP project, the contractual matrix will always dominate the structure and everyone involved will be aware of the risk-transfer mechanisms. “Allied to risk allocation is the requirement for the appropriate insurances. A suite of project specific policies will be used recognising the interests of all stakeholders such as the investor, design and build contractors, subcontractors, plus facilities managers and their contractors for the operational phase.”

These policies, Roberts says, typically provide protection against the cost of reinstating material damage to assets; any reduction an insured event may cause in the revenue the asset generates and/or reductions in unitary charges; and any third-party liabilities throughout the entire project life cycle.

While it is no secret today’s soft market conditions are particularly prolonged, and while the PPP infrastructure market follows the same market cycle as the broader construction market, there are certain characteristics that make PPP projects particularly sensitive to the cyclical nature of the market, according to Knowles. “The long-term nature of the projects – 30 years plus – means customers must have an in-depth understanding of the market cycle and historical pricing to factor in the right amount of contingency, while remaining competitive. Furthermore, companies set up to deliver these projects have a very low capital base and therefore low deductibles, and the widest form of coverage is normally a strict requirement, all of which can be challenging in a hard market.”

Although the international insurance and reinsurance market has always played a major role in large, complex infrastructure projects, particularly when project finance is involved, it needs to work with local insurance requirements and regulations. “Some of the regional hubs are becoming significant players in their own right, so it tends to be a mixture of local and international markets on these big infrastructure deals,” Knowles says.

Although each jurisdiction throughout the Mena region has its own policies with regard to the extent to which international insurers can participate in domestic infrastructure transactions, for the larger, more technical and risky projects (such as petrochemicals and power generation) it is normally the case that lenders will insist on something like 90% to 95% of the main insurance risk being placed with investment-grade international insurers, Creed says. “Any such offshore insurer may be required to enter into reinsurance assignment deeds or reinsurance cut-through deeds, as the case may be,” he says.

Customers increasingly prefer to purchase insurance in their local markets, Knowles says. “But this is a global trend not only applicable to PPP or infrastructure projects; this is particularly true in emerging markets. Furthermore, there is evidence that confirms London’s share of premium is declining. However, overall premium numbers remain high, reflecting the increasing demand for infrastructure.”

But Knowles adds London is still the best-placed market for underwriting the largest and most complex risks. “PPP projects, especially those relating to infrastructure, are just that. Furthermore, London is still the market for excess and surplus capacity from around the world. Therefore, even where large PPP projects are insured locally, they often find themselves reinsured into London via Lloyd’s, for example.”

Source – Insurance Day

Mark Thompson appointed Head of MCL and CEO Cunningham Lindsey International

Cunningham Lindsey are pleased to announce the appointment of Mark Thompson as Global Head of MCL and CEO of Cunningham Lindsey International, replacing Rupert Travis.

Mark is currently Head of our MCL team in Australia; he is an excellent match for this role: having both loss adjusting and insurance forensic accounting practices. He has extensive international experience, particularly in Asia, Africa and the Americas; and he has a strong understanding of the London market from his time managing Xchanging Claims Services. We are delighted that Mark has accepted this position and are confident that he will lead the MCL and International teams to further growth, as he returns to London on 17th March to take up this position.

Cunningham Lindsey International are moving

We are moving physically closer to Lloyd’s and the London Market with effect from 23 February 2015. We are joining our colleagues from Cunningham Lindsey UK at our existing Fenchurch Street offices.

The new office address will be:

60 Fenchurch Street, London, EC3M 4AD

All of our email addresses and telephone numbers will stay the same, including the switchboard:

+44 207 816 1800 (main switchboard)

‘Turning the key on effective motor claims management’ by Mark Gilbert of Profecta

A well-managed response to first notification of loss can result in a swift resolution to a claim, customer satisfaction and, ultimately, better customer retention

According to the Association of British Insurers (ABI), the motor insurance market last made an underwriting profit in 1993. Undoubtedly the highly competitive nature of the market is a major factor, one illustration of which is the ABI’s average motor insurance premium tracker. This shows the average motor premium for private motor vehicles has continues on a downward trajectory since collection of the data began, falling from around £415 ($643) in 2012 to £360 by the middle of 2014.

With premiums falling, it is increasingly important insurers adopt and execute sharp and efficient systems for the handling of motor claims. Having well-managed practices in place will create the basis for the smooth processing of the claim, from initial loss through assessment to compensation. Such a basis is crucial not only to minimise costs for both the insurer and the client, but also to build a strong customer loyalty and a first-class reputation.

Right first time

Getting it right, at the outset, is crucial. A well-managed, 24/7 first notification of loss process is vital in a number of ways. In many cases it will be the first time the client has been in contact with their insurer, so handling this contact well can create a good first impression and can dictate the success of the rest of the claims process. Timing is also critical. The first notification operation can be extremely time-sensitive.

The first notification operation has evolved in recent years in parallel with the increasing importance of the role. We have seen some firms offering the first notification service using a software-based platform, while others prefer a call centre model and to develop their own proprietary application. Some have an internal function within the insurance company, but increasingly many are outsourced to specialist providers.

However the service is provided, though, getting this first stage of the process right can be key to a swift resolution, customer satisfaction and, ultimately, retention. It also presents the opportunity for motor insurers to generate additional business.

Proactive third-party engagement and the benefit of having an effective process should not be underestimated. The main advantage of this “capture” is the party providing compensation is able to control the cost of the third-party claim – for instance, by using trusted third-party administrators, preferred vehicle repair shops and car hire firms. In straightforward motor claims – where solicitors or medical professionals are not required – such effective third-party engagement is the most cost-efficient way of settling a claim from the insurers’ perspective.

However, claimants’ lawyers argue their clients may be disadvantaged by it. The introduction of a new voluntary code of conduct for members of the ABI last year was a good step forward. The code, initially signed by 15 leading insurance firms, aims to ensure the interests of customers with a personal injury claim are protected.

The wider availability of nascent technology is hugely beneficial in this area. For example, smartphone apps are being developed that are able to identify a third party’s details and share them with insurers. Although this is an area that needs to be approached with caution, as it can give rise to data protection issues relating to the acquisition, storage, handling and sharing of personal information, it does give claims handlers and associated parties the opportunity to contact customers instantly.

Partnering for success

In another development aimed at streamlining the process, claims-management firms are increasingly teaming up with specialist insurance firms to share best practices and ensure the claim is managed in such a way that all legal bases are covered. Traditionally, a law firm would normally only become involved at the point where a claim became litigated, but by adopting a more collaborative approach, unforeseen issues can be sidestepped and legal costs kept to a minimum.

As well as having a close relationship with law firms, it is also crucially important to have the end-to-end supply chain, body-shops , hire companies, rehabilitation experts all managed by the claims-management companies. With direct contracts with the supplying partners and access to total claims costs at their fingertips, insurers are much better placed to control spend and defend claims, ultimately benefiting all policy-holders. There is also the added benefit of consolidated management information, which is crucial in terms of handling risk.

Insurers are continually evolving to provide a better service for their customers and to ensure costs are kept under control. Fine-tuning effective working practices, refining the “third-party capture” model, the use of cutting-edge technology and working closely with suppliers from day one are some of the ways in which insurers are ensuring they are ahead of the game and, importantly, keeping a keen control on expenditure.

Mark Gilbert is client partnerships director at Cunningham Lindsey and Nick Rogers is head of motor at BLM. Profecta is a joint venture between Cunningham Lindsey and BLM