Welcome to RIMS 2009 Annual Conference & Exhibition

1. Welcome to RIMS 2009 Annual Conference & Exhibition • Familiarize yourself with the Emergency Exits • Silence Cell Phone/Blackberry • Your Feedback is very important to RIMS and to the Speaker(s). Please complete the session evaluation form and return to the door Monitor. (For (IND) industry sessions, please give the completed form to the moderator of the session.) • Here’s to a greener meeting! To support RIMS Green Initiative, there are no printed handouts. Visit www.RIMS.org/Handouts to download available handouts. Printing on Demand stations are available in Lobby A of the Orange County Convention Center, as well as in RIMS cyber stations located in booths #431 and #1759 in the Exhibit Hall.

2. Accurate Business Interruption Values – How Important Are They, Really? April 22, 2009 Moderator: Tracy Alan Saxe, Saxe Doernberger & Vita P.C. Speakers: David Huntley, CVS Caremark Corporation Ray Hutnik, Marsh FACS Practice

3. Insurance Industry Trends • With current climate with the insurance industry – only going to get worse • Economy • Declines in surplus • Combined ratios (2009 estimated at 116.6%) • Rating downgrades

4. Case Study? • History/Engagement of FACS • Historical figure used to be a “plug” without justification • 2002 – Underwriters began scrutinizing BI calculations due to significant landmark cases • 2004 – 2005 – Engaged FACS • Annual Review • Acquisition Analysis

5. BI Valuation Benefits • History of acquisitions – Integration into program • Focus on AMBIL vs BI Calculation – AMBIL represents REALITY • To your advantage to report accurate values – eliminates coverage issues at time of loss, ie. Location Limits • PREMIUM Savings (Example – Paul Terrienn to provide details)

6. BI Valuation Benefits • Consistent Analysis / Approach in dealing with BI • Builds credibility with underwriter – Eliminates uncertainty • Facilitates renewal process • Forces a thorough understanding of your program/exposures • Allows tailoring of your program to your needs/exposure (Example – LaHabra – Paul Terrien to provide details)

7. Business Interruption (BI) Coverage • BI coverage is intended to do for the business what it would have done for itself had no loss occurred • Coverage generally triggered by physical damage insured’s property • Generally reimburses revenues less non-continuing expenses during period of indemnity

8. BI Coverage May Be Triggered by Damage to Other Property • Contingent Business Interruption (CBI) • Interdependent properties • Civil authorities • Ingress/egress • Service interruption

9. What Is Typically Covered? • Actual loss sustained: • Loss of profit margin resulting from loss of sales • What is typically not covered? • Indirect/consequential loss • Brand damage • Impact on share price

10. BI Variables Three essential variables: • Time • Revenue • Costs

11. What Are BI Values? • A projection of what the business will do during a 12 month period • Annualized estimate of gross revenues less variable expenses • May or may not include ordinary payroll

12. How are BI Values Used? • To determine annual premium • To allocate premium to business units • To determine Probable Maximum Loss (PML), Maximum Foreseeable Loss (MFL), and Anticipated Maximum Business Interruption Loss (AMBIL) • To determine location limits of liability • To determine deductibles

13. How can one business interruption value worksheet answer all of those questions?

14. BI – Gross Earnings WorksheetTwo Item – Deductive Basis (Page 1 of 3)

15. BI – Gross Earnings WorksheetTwo Item – Deductive Basis (Page 2 of 3)

16. BI – Gross Earnings WorksheetTwo Item – Deductive Basis (Page 3 of 3)

17. BI Value Concerns from an Insurance Perspective • Are values computed in a manner consistent with industry standards across all insurance markets? • Are reported values suitable for calculating PMLs, MFLs, and AMBILs? • Are reported values a reasonable basis for calculating premiums and determining locations limits and deductibles? • Are significant interdependencies recognized in the underwriting process? • Are significant CBI exposures disclosed? • Are adequate loss control measures in place to reduce loss exposures?

18. Operational Risk Exposures Affecting BI Values • Complex supplier and customer dependencies • Inter-company operational relationships • Highly specialized personnel • “Lean” operations • Paperless environments • Regulatory influences • Seasonal sensitivities • What else?

19. Does Your BI Value Reporting Accurately Identify All These Exposures? • Direct BI: loss of margin due to an adverse event at a facility • Business Interruption Interdependency (BII): loss of margin at one corporate facility due to an adverse event at another corporate facility supplying or being supplied • CBI: loss of margin at a facility due to loss of raw materials, services, or support from an outside supplier, or loss of margin due to loss of a major customer • Period of indemnity/extended period of indemnity

20. Furthermore, Does Your Company… • Use a global, consistent process for evaluating, accounting, and validating BII exposures? • Have operational, financial, and recovery discussions around risk? • Operate in a “lean” industry? • Have plans for growth? • Experienced recent management changes? • Get squeezed and sub-limited on BI/CBI/BII coverages?

21. Differing Perspectives of Personnel Who Define BI Risk • Chief Executive Officer • Chief Financial Officer • Chief Operating Officer • Risk Manager • Risk Officer • Production • Sales/Marketing • Engineering • Product Development

22. BI Exposures:Where Are Organizations Concerned? Source: AMR Research, Deriving Reward From Supply Chain Risk, January 31, 2008

23. BI Studies Are Challenging • Difficult to identify and represent complex operations • Competing departmental agendas and perceptions influence the identification process • Operations are dynamic and need to be represented in a way where updates are easy • Analysis may be inconsistent from one business unit to the next

24. The Unique BI Challenges Characteristics of BI risk: • Operational risk and valuations not aligned: • Supply chain mapping vs. BI worksheet • Complexity: • Interdependent manufacturing and distribution processes • International exposure to operations and logistics • Significant use of third party manufacturing • Risks and consequences for BI may be mitigated by continuity plans • Avoidance of inaccurate insured risk profile

25. BI Values Versus Loss • Values need to consider all locations (multiple calculations) vs. losslocation • For values- need to consider changes since prior year calculation • Values consider policy period (typically 12 months) vs. loss calculation, which considers the period of indemnity • Loss will also consider operating expenses to determine if they do or do not continue following the loss: • Some may or may not be insured (ordinary payroll) • Time element loss may also impact additional costs such as sue and labor, expediting expenses, expense to avert, and extra expenses

26. Issues Prevalent in BI Scenarios • Mitigating the loss/extra expense • Determining the proper period of restoration • Extended period of indemnity • Interplay with amounts recovered under property damage coverage: • Payroll for clean-up or repairs • Overheads applied to repair costs or labor • Contingent BI: • “Supply chain” issues • Upstream/downstream • Suppliers/customers

27. Annual BI Values – Insurer Requests • What is requested from insurers? • Expected annual revenues (sales value of production) • Less expected annual cost of sales (variable portion only) • For one-year (12 month) prospective period • Insurer worksheets use “top down” or “bottom up” approach • Insurers often provide elaborate worksheets intended to assist in the process (typically too generic or confusing)

28. A Methodical Approach to a Seemingly Daunting Task Can Get You to the Finish Line

29. Annual BI Values – Insured’s Preferred Format • Utilize the presentation that most accurately portrays your business: • Use top down approach • Use income statement as “checklist” • Income statement format is acceptable • Consider providing carrier with AMBIL/MFL/PML scenarios with BI values worksheets: • Supplemental information that could improve your “risk profile”

30. Setting BI Limits • Start with annual BI valuation calculation (BI worksheet or equivalent) • Consider time to repair/replace following major loss event and value stream impact • Consider AMBIL amount—includes consideration for ability to mitigate loss: • Value stream mapping/supply chain modeling • Redirection of production • Use of inventory • Outsourcing • Consider scenarios combining property damage, BI, extra expense, expediting expense, and expenses to avert the loss • Consider costs of mitigation

31. Bringing Together Risk, Finance, and Operations - Value Stream Mapping

32. Sample BI Matrix (VSM)

33. Sample Maximum Extra Expense Loss Scenario Note: All schedules prepared by FACS working closely with the ABC Company personnel utilizing the information and estimates ABC personnel provided to FACS.

34. Integrated Approach towards Addressing BI ChallengesCombines Engineering, Forensic Accounting, and Claims Management

35. Case Study #1 ABC Retail Corporation • Overall BI worksheet (customized for insured’s business) • Overall BI value by location • AMBIL calculation for: • Largest DC • DC exposed to earthquake • DC exposed to hurricane • Detailed communication of exposures leads to informed decision-making

36. Case Study #2 ABC Consulting Corporation • Company has minimal BI exposure based on sophisticated business continuity planning (BCP) strategies already established • Concern is the cost to implement BCP • Need to establish an anticipated maximum extra expense loss scenario • Case study assumes a 24-month loss period • BCP assumes affected metropolitan location will temporarily operate out of two locations • One smaller location in the city • One large suburban location

37. Pre-Loss Planning Claim adjustment is difficult when BI exceeds insurer expectations Legal consequences of under-reported BI values Premium calculation vs. coverage rights Painful renewals

38. Buckets to Aim For • Due to physical injury or risk of physical injury OR • Without physical damage

39. Buckets to Aim For

40. Coverage Grant Buckets to Aim For • Physical Injury to Premises • Triggering Events • Period of Restoration • Mitigation

41. Buckets to Aim For • Coverage Without Physical Damage • Dependent Property • Ordinance • Special Attractions • Blockage

42. Exclusions – Buckets to Avoid • Loss of Market Share • Law or Ordinance • Consequential Loss • Excluded Causes of Loss

43. Measuring Your Losses • Calculations • Business Income • Personal History v. General History • Course of Construction Conversion: Future Productivity v. Past History • Bump • Offset

44. Summary • Review policy regarding: • Method of calculation • Coverage • Exclusion • Properly present claim the first time • Proper coverage analysis • Proper calculation method • Comprehensive accounting

45. Teamwork

46. Conclusion Accurate business interruption values are important, but understanding your real world business interruption exposures are MOST important!