B R I N G I N G F I G U R E S I N T O F O C U S Commodity Prices Spike following Major Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’ *Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822, Phone: 0207 265 0777; [email protected] Date: 30 / 01 / 2007 Prepared for: Opera, London Presented by: Markus Heiss*, MDD
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B R I N G I N G F I G U R E S I N T O F O C U S
Commodity Prices Spike following Major
Disasters: ‘Accounting Issues for Consideration in BI Loss Measurement.’
*Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822,
Phone: 0207 265 0777; [email protected]
Date: 30 / 01 / 2007Prepared for: Opera, LondonPresented by: Markus Heiss*, MDD
Introduction
Accounting Issues
Legal Issues
Introduction
Accounting Issues
Legal Issues
Objective BIObjective BI
Do what the business would have done for the insured had
the ‘loss’ not occurred
Adjustment ClauseAdjustment Clause
Policy Definition: “The Turnover / Gross Profit during the period in the 12
months immediately before the date of the damage”But Variation Clause:
“…to which [Rate of Gross Profit, Standard Turnover and Annual Turnover] such adjustments shall be made as
may be necessary to provide for the trend of the business either before or after the loss or which would
have affected the business had the loss not occurred so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the loss would have been obtained during the period
after the loss”
Projection Dilemma
If price spikes occurred – 2 options for projection:
No Disaster
Disaster
Commodity Prices and Disasters
Commodities
Timing
Drivers
Price elasticity and leverage
Daily Crude Prices – Timing
Brent and WTI Daily Crude Prices
55
57
59
61
63
65
67
69
Day
$/B
arr
el
WTIBrent
Commodity Price Drivers
Market Supply & Demand
Contractual
Negotiation
Competitor
Political Climate
Domestic and International
Issues
Environmental Circumstances
Financial Markets
Market Circle
Pre loss Post Loss
Selling Price 100 10% 110Raw Material Cost -50 10% -55Margin 50 55
Leverage Effect of Price Changes
Refinery Margin Evolution
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$ pe
r B
arre
l$
per
Bar
rel
Margin and Crude Cost
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05
Month
US
$ (0
00)
Margin Crude Cost
Segregation of Price Spike Impact on BI
Cause
Degree
Separation
Amounts can be put into their buckets
Segregation of Price Spike Impact on BI
Price Spike
Insured Event Other ‘Market’ Reasons
Caused by ‘Insured Peril per Policy’
Caused by ‘Physical Loss that Triggered
Policy’
Impact of Price Changes for BI Measurement
Gross and Net Profit
NoYes
Loss Make up / Mitigation
Deductible
Sum Insured / Under insurance
Economic Limits
ICW / EE
Continuing – Fixed Costs
Variable Cost
Revenue
Gross and Net Profit
NoYes
Loss Make up / Mitigation
Deductible
Sum Insured / Under insurance
Economic Limits
ICW / EE
Continuing – Fixed Costs
Variable Cost
Revenue
Impact of Price Changes for BI Measurement
XGross and Net Profit
NoYes
XLoss Make up / Mitigation
XDeductible
XSum Insured / Under insurance
XEconomic Limits
XICW / EE
XContinuing – Fixed Costs
XVariable Cost
XRevenue
XGross and Net Profit
NoYes
XLoss Make up / Mitigation
XDeductible
XSum Insured / Under insurance
XEconomic Limits
XICW / EE
XContinuing – Fixed Costs
XVariable Cost
XRevenue
Impact of Price Changes for Refinery
XGross and Net Profit
Refinery
PossibleLoss Make up / Mitigation
PossibleDeductible
XSum Insured / Under insurance
XEconomic Limits
PossibleICW / EE
Usually Not
Continuing – Fixed Costs
XVariable Cost
XRevenue
XGross and Net Profit
Refinery
PossibleLoss Make up / Mitigation
PossibleDeductible
XSum Insured / Under insurance
XEconomic Limits
PossibleICW / EE
Usually Not
Continuing – Fixed Costs
XVariable Cost
XRevenue
Impact of Price Changes for Steel Mill
YesGross and Net Profit
Steel Mill
PossibleLoss Make up / Mitigation
PossibleDeductible
YesSum Insured / Under insurance
YesEconomic Limits
YesICW / EE
PossibleContinuing – Fixed Costs
YesVariable Cost
YesRevenue
YesGross and Net Profit
Steel Mill
PossibleLoss Make up / Mitigation
PossibleDeductible
YesSum Insured / Under insurance
YesEconomic Limits
YesICW / EE
PossibleContinuing – Fixed Costs
YesVariable Cost
YesRevenue
Impact of Price Changes for Power Generation
YesGross and Net Profit
Power
PossibleLoss Make up / Mitigation
DependsDeductible
PossibleSum Insured / Under insurance
YesEconomic Limits
YesICW / EE
No (poss)Continuing – Fixed Costs
YesVariable Cost
PossibleRevenue
YesGross and Net Profit
Power
PossibleLoss Make up / Mitigation
DependsDeductible
PossibleSum Insured / Under insurance
YesEconomic Limits
YesICW / EE
No (poss)Continuing – Fixed Costs
YesVariable Cost
PossibleRevenue
Timing Issues – Price Changes and Profitability
Correlation Input and Output
Timing
Buyers or Sellers Market
Market Transparency
Pricing Mechanism
Hurricane Induced vs. Normal Commodity Market
Price Changes
Accountants Assistance
Can we Solve ?; Can we help ?– Identify impact on BI measure– Market price investigations– Separation of loss sustained between market
event / period and loss related increases
Need to work with other experts / detailed evaluation market situation – determine market price drivers
B R I N G I N G F I G U R E S I N T O F O C U S
Questions ?
*Markus Heiss is a Partner at MDD London UK LLP - Mobile: 07730 985 822,
Phone: 0207 265 0777; [email protected]
Date: 30 / 01 / 2007Prepared for: Opera, LondonPresented by: Markus Heiss*, MDD
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