Business Interruption Values & Exposures

1. Business Interruption Values & Exposures Dempsey, Myers & Company Quinnipiac University June 14, 2006

2. Today’s Presentation • BI Basics • BI Values Explained • Values v. Exposures • Hypothetical Claims

3. A Business Interruption Primer • The purpose of BI coverage is to do for the business what it would have done for itself had there been no loss. • Coverage generally triggered by physical damage. • Reimburses net profits, continuing expenses and expenses incurred to reduce loss • Optional coverage for extra expenses to continue operations • Duty to mitigate

4. Coverage Triggered by DirectDamage to Insured Property • Underlying Form: ISO/Proprietary/Manuscript • Extended Period of Indemnity • Research and Development • E-Commerce • Extra Expense

5. Coverage Triggered byDamage to Other Property • Contingent Business Interruption • Contingent Extra Expense • Interdependent Properties • Civil Authorities • Ingress/Egress • Service Interruption • Leasehold Interest • Royalties

6. Business Interruption • Three Essential Variables: • Time • Revenue • Costs

7. Business Interruption Key Revenue Streams - 2006 ($2.95b) Departmental Investments/Other activities Auxiliary 2% 4% activities 13% State of Michigan 38% Student fees 24% Federal Local and private programs programs 12% 7%

8. Business Interruption Expenditures and Surplus - 2006 Surplus Fixed/other 5% G&A expense 4% Instruction/research 6% 40% Operating expense 18% Scholarships Services 10% 17%

9. Business Interruption Reclassification of Expense Components Surplus Fixed Cost 5% 10% Semi-Variable Cost 21% Variable Cost 64%

10. BI Loss - Total Suspension

11. BI Loss - Partial Suspension

12. Business Interruption Loss Evaluate Nature of Revenue: • Will it abate in the event of loss? • State of Michigan appropriations • Other government aid • Student fees • Auxiliary activities • Research grants • Interest

13. Business Interruption Loss Evaluate Nature of Cost: • Will it abate in the event of loss? • Instructional costs (salaries, supplies) • Utilities and maintenance • Auxiliary expenses • Research costs • General & Administrative costs • Depreciation and interest

14. What are BI Values? A projection of what the business will do during a 12-month period

15. What are BI Values? • Annualized estimates of net profit and “continuing” (fixed) expenses • May or may not include “ordinary payroll” (direct labor expense) • Computed for each insured location where earnings are produced • Policy requirement of most insurance markets

16. How are BI Values Used? • To determine annual premium • To allocate premium to business units • To determine Probable Maximum Loss (PML) and Maximum Foreseeable Loss (MFL) yardsticks • To determine location limits of liability • To determine Average Daily Value (ADV) deductibles

17. BI Value Concernsof the underwriter • Location exposures and values • Are high MFL locations properly identified? • EQ and windstorm exposures • 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. BI Value Concernsof the risk manager • Conceptual framework and accuracy • Do business units understand the purpose and importance of accurate BI value reporting? • Premium allocation • Are reported values calculated consistently among business units and locations? • Process efficiency • Is the right amount of data reported? • Is the collection process rational and efficient?

19. BI Value Concernsshared by risk managers and underwriters • Accuracy • Are reported values based on reality? • Are values computed in a manner consistent with industry standards across all insurance markets? • Are reported values suitable for calculating PML’s and MFL’s, and for allocating insurance capacity? • Are reported values a reasonable basis for calculating premiums and determining location limits and deductibles?

20. Hypothetical Claim 1 Dormitory Flood Assumptions • Heavy rains flood basement and first floor • Dormitory evacuated • Students relocated • Hotels and other temporary quarters • Two month repair period • Ten students quit school, seek refunds

21. Hypothetical Claim 1 Dormitory Flood Assumptions • Heavy rains flood basement and first floor • Dormitory evacuated • Students relocated • Hotels and other temporary quarters • Two month repair period • Ten students quit school, seek refunds

22. Hypothetical Claim 1 Dormitory Flood Issues Presented • Value of extra expense loss • Living expenses • Transportation • Value of business interruption loss • Lost room revenue • Lost vending profits

23. Hypothetical Claim 2 Service Interruption - Student Center Assumptions • Natural gas curtailment in January • No heat or hot water • Building closed for one week • Book Store closed • Food service suspended • Meeting rooms closed

24. Hypothetical Claim 2 Service Interruption - Student Center Issues Presented • Value of business interruption loss • Lost Book Store Profits • Lost Food Service Profits • Loss Mitigation • Value of extra expense loss • Meeting relocation costs

25. Hypothetical Claim 3 Laboratory Fire - R&D Loss Assumptions • Biochemical experimentation • US Government funded for fiscal 1997 • Three-fourths completed at time of fire • Entire experiment lost; nine months to replace • Grant revenue $1 million; fixed cost $83,000/month • One month total suspension to repair fire damage • Risk of losing future grants if fail to complete

26. Hypothetical Claim 3 Laboratory Fire - R&D Loss Issues Presented • Value of business interruption loss • Total suspension period - 30 days • Remainder of period - 9 months • Lost opportunities • Other potential losses • Expediting costs • Extra expenses

27. Q&A

28. Contact Details Sharon Pisko Wolfe, CPA Dempsey, Myers & Company LLP 426 Danbury Road Wilton, CT 06897 203-762-5052 sharonwolfe@dempseymyers.com Karen Henricksen, CPA, CFE Dempsey, Myers & Company LLP 127 East 56th Street, 4th Floor New York, NY 10022 212-319-8717 karenhenricksen@dempseymyers.com