6/3/2015 1

2015 IFAA 6th Educational Conference Catastrophe Claims – Focus on Latin America Claims Handling Lessons from – A Forensic Accountant’s Viewpoint Roberto Quintana CPA, CFF, CFE Juan E. Lopez-Santini CPA, CFF, CFE

Miami, FL 19 May 2015 OUTLINE

• HURRICANE ODILE DOL Sept 15, 2014 - Quick Facts & Figures

• Claims Handling Old & New Lessons Hurricane Odile – A Forensic Accountant’s view

6/3/2015 3 Quick Facts about Hurricane Odile

• In 2014 Hurricane Odile goes into the record books as the strongest on record during the modern recordkeeping era for 's Baja California peninsula. • The September 14-15, 2014 was at a strong Category 3 storm made a direct hit on a 20 mile (32 km) stretch of coast line between Cabo San Jose and • The hurricane force winds reached past the city of La Paz, Mexico or 130 Miles north of Cabo San Lucas.

6/3/2015 4 Landfall of Hurricane Odile

6/3/2015 5 Track of Hurricane Odile

6/3/2015 6 Hurricane Odile – 6th Most Expensive Pacific Storm in Eastern Pacific

Costliest Known Pacific Hurricanes

Rank Storm Season Cost (2014 USD)

1 Manuel 2013 $4.25 billion 2 Paul 1982 $3.81 billion 3 Iniki 1992 $3.03 billion 4 Beatriz 1993 $2.78 billion 5 "Mexico" 1959 $2.27 billion 6 Odile 2014 $1.22 billion 7 Octave 1983 $1.21 billion 8 Agatha 2010 $1.19 billion 9 Aletta 1982 $1.12 billion 10 Norman 1978 $1.08 billion List of Pacific hurricanes: Weather Channel 6/3/2015 7 Claims Handling Accounting Lessons - Hurricane Odile

I. Old Lessons Re-Learned

II. New Lessons

6/3/2015 8 Claims Handling Accounting Lessons - Hurricane Odile

I. Old Lessons Re-Learned:

A. Wide Area Damages (WAD), Loss of Attraction & Denial of Access – Effect on B.I.

B. Continued Undervalued Business Interruption (B.I.) Declarations

C. Indemnity Period Repairs - Early Bird gets the worm!

6/3/2015 9 Wide Area Damages - Denying Access & Delaying Recovery

6/3/2015 10 San Jose de Los Cabos International Airport Damages – Limited Reopening Oct 8, 2014

6/3/2015 11 Loss of Attraction - Some Beach Erosion

6/3/2015 12 Loss of Attraction - Beach Erosion But Not All Hotels

6/3/2015 13 Claims Handling Accounting Lessons - Hurricane Odile

A. Wide Area Damages – Denial of Access & Loss of Attraction 1. Wide Area Damages (WAD) and the resulting Loss of Market and Denial of Access continues to be a material adjustment issue for Business Interruption Claims that, although evident, insured’s resist to accept as a policy deduction when the accounting numbers show otherwise. 2. Loss of earnings due to WAD damages are certainly mixed into the post event loss of earnings but it is still difficult to separate from covered losses. 3. There is certainly a negative effect over earnings in most insured’s earnings due to Denial of Access, WAD, Loss of attraction/market. This effect can observed in the following case file

6/3/2015 14 Claims Handling Lessons from Hurricane Odile – Loss of Attraction Valuation (Case File of Hotel X)

CLAIMED B.I. Vs. DOCUMENTED VALUES - LOSS OF ATTRACTION ADJUSTMENT Hotel X, Cabo San Lucas, México Hurricane Odile Loss, D.O.L. September 15, 2014.

Actual Odile Case. Values & Names changed to protect confidentiality. Values Shown are proportional to those in Case file.

Claimed Values for Business Interruption by Third Party Claim Preparation Service - Loss/(Excess)

Property Rental Extra Costs/ & End Date Beach Club Spa Bar Total All Depts. Management Program Other Savings

x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $

30-Sep-14 82,304 16,419 35,470 25,782 2,811 0 162,787 31-Oct-14 61,161 91,012 34,884 24,251 (723) 0 210,585 30-Nov-14 42,208 93,222 9,856 (6,027) 2,043 0 141,302 31-Dec-14 (21,414) 82,159 6,071 (14,450) 1,209 0 53,574 31-Jan-15 0 0 0 0 0 0 0

Total 164,260 282,811 86,280 29,556 5,341 0 568,248 6/3/2015 15 Claims Handling Lessons from Hurricane Odile – Loss of Attraction Valuation (Documented Values) Claimed Values for Business Interruption by Third Party Claim Preparation Service - Loss/(Excess) Extra Costs/ Property Rental Beach End Date Spa Bar & Other Total All Depts. Management Program Club Savings x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $

Total 164,260 282,811 86,280 29,556 5,341 0 568,248

QLDG's Results of Documented Business Interruption Value & Values Accepted by Insured Extra Costs/ Property Rental Beach End Date Spa Bar & Other Total All Depts. Management Program Club Savings x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $

30-Sep-14 (21,787) 11,639 16,693 (4,239) 0 1,632 3,938 31-Oct-14 26,023 77,872 35,278 5,810 0 (11,525) 133,458 30-Nov-14 4,376 60,395 23,656 (3,742) 0 20,908 105,592 31-Dec-14 (10,650) 73,737 17,504 1,799 0 (44,504) 37,886 31-Jan-15 (18,689) 16,765 10,303 (1,566) 165 2,102 9,080 Total (20,727) 240,408 103,435 (1,939) 165 (31,388) 289,954

Accounting Differences Documented to Claim Ratio - % 51%

Effectiveness of QLDG's Accounting Review of Claim 49% 6/3/2015 16 Claims Handling Lessons from Hurricane Odile – Loss of Attraction Valuation – Effect of Loss of

CLAIMED B.I. Vs. DOCUMENTED VALUES - LOSSAttraction/Market OF ATTRACTION ADJUSTMENT Hotel X, Cabo San Lucas, México Hurricane Odile Loss, D.O.L. September 15, 2014.

QLDG's Results of Documented Business Interruption Value & Values Accepted by Insured Extra Costs/ Accumulated Property Rental Beach As A % End Date Spa Bar & Other Total All Depts. as a % of Management Program Club of Total Savings total x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $ x00's Mex $

30-Sep-14 (21,787) 11,639 16,693 (4,239) 0 1,632 3,938 1% 1% 31-Oct-14 26,023 77,872 35,278 5,810 0 (11,525) 133,458 46% 47% Note 1 30-Nov-14 4,376 60,395 23,656 (3,742) 0 20,908 105,592 36% 84% 31-Dec-14 (10,650) 73,737 17,504 1,799 0 (44,504) 37,886 13% 97% 31-Jan-15 (18,689) 16,765 10,303 (1,566) 165 2,102 9,080 3% 100% Total (20,727) 240,408 103,435 (1,939) 165 (31,388) 289,954 100%

Accounting Differences Documented to Claim Ratio - % 51%

Effectiveness of QLDG's Accounting Review of Claim 49%

Note 1: Hotel Re-Opened on Oct 15, 2014 with enough rooms and All Services to meet seasonal demand of Oct 2014. All repairs where finished by October 31, 2014.

6/3/2015 17 Claims Handling Accounting Lessons - Hurricane Odile Proximate Cause

• Perhaps the most important and ignored concept

• As defined on “Interruption Insurance. Proximate Loss Issues”(Gordon Hickmott):

• it was the underwriters’ intention for the loss to be met up to the level that it would have been, had the damage been restricted to the insured’s own property at the premises.

• What insurers did not intend to pay for was the “aggravation” of the loss by virtue of the wide area damage which might, extend the indemnity period and/or accentuate the diminishment of turnover once reinstatement was complete or during periods when partial trading was possible

6/3/2015 18 Claims Handling Accounting Lessons - Hurricane Odile

Old Lessons Re-Learned -

B. Declared values are Still Under Reported – Application of Average Clause

6/3/2015 19 Claims Handling Accounting Lessons - Hurricane Odile

B. Declared Values & Application of Average Clause - Declared B.I. values continue to be widely under-reported by insureds which is leading to material Average Clause/co-insurance adjustments.

- On the other hand, the Average Clause continues to be a very useful tool in keeping partial losses within an equitable adjusting range by keeping the insured’s B.I. loss expectations within reasonable values/trends.

- Nevertheless, about 50% of QLDG’s Odile case files showed a range from 40 to 60% insurance adequacy. (See the Following Actual Odile Case File for Hotel Y) 6/3/2015 20 Claims Handling Accounting Lessons - Hurricane Odile B. Declared Values & Application of Average Clause

- In the 2012 survey findings by Vericlaim’s Director Damian Glynn presented to the Chartered Institute of Loss Adjusters (CILA) shows that a survey of insurance industry professionals indicated that about 40% of policies are underinsured with 55% average level of adequacy. - CILA’s survey findings also state that 52% of all clients surveyed either misunderstood the Gross Profit Definition or had insufficient explanations. - QLDG’s cases experienced about a 40 to 60% level of adequacy. History repeats itself in Mexico. - CILA’s 2012 Survey is in line with QLDG’s 2014 Odile findings, see next example.

6/3/2015 21 Claims Handling Accounting Lessons - Hurricane Odile Business Interruption Calculations - Effect of Average Clause Hotel Y- Cabos Mx. Odile Hurricane, Hurricane Odile F.D. P. 15 de September 2014 Actual Odile Case. Values & Names changed to protect confidentiality. Values Shown are proportional to those in Case file. Case Not Closed at time of Publishing

Source: Schedule 2 Schedule 4 Schedule 3.1 Waiting Period Co-Aseguro Infraseguro Sch. 2.1 43.69% 7 10% 58% BI Value Net of Gross Business Deduction due to BI Value Net of Deductible, Less Savings in Interruption Value 10% Windstorm BI Less Deductible Deductible, Sharing Official Sharing and Variable Costs Sales Less Variable Before Policy BI Less Sharing by and Winstorm Average Clause and Average Clause Exchange Rate Average Clause Cumulative Mes Loss of Sales & Expenses Costs/Expenses Labor Savings Adjustments Deducible Deductible Insured Sharing Deduction Deductions for Month Deductions Value MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN MXN por US$ US$ US$ Sep-14 13,703,006 (5,986,407) 7,716,599 (73,651) 7,642,948 -3,343,790 4,299,158 (429,916) 3,869,243 (2,244,161) 1,625,082 13.2182 $ 122,943 $ 122,943 Oct-14 22,798,746 (9,960,046) 12,838,700 (238,282) 12,600,418 12,600,418 (1,260,042) 11,340,376 (6,577,418) 4,762,958 13.4239 $ 354,812 $ 477,755 Nov-14 23,523,011 (10,276,454) 13,246,557 (116,146) 13,130,411 13,130,411 (1,313,041) 11,817,370 (6,854,074) 4,963,295 13.7667 $ 360,529 $ 838,284 Dec-14 27,968,121 (12,218,381) 15,749,740 (81,423) 15,668,317 15,668,317 (1,566,832) 14,101,485 (8,178,861) 5,922,624 14.7180 $ 402,407 $ 1,240,690 Jan-15 32,383,924 (14,147,505) 18,236,419 (166,176) 18,070,243 18,070,243 (1,807,024) 16,263,219 (9,432,667) 6,830,552 14.8414 $ 460,236 $ 1,700,927 Feb-15 33,368,119 (14,577,468) 18,790,651 (122,976) 18,667,675 18,667,675 (1,866,768) 16,800,908 (9,744,526) 7,056,381 14.9624 $ 471,608 $ 2,172,534 Mar-15 35,630,741 (15,565,936) 20,064,806 (152,355) 19,912,451 Note 1 19,912,451 (1,991,245) 17,921,206 (10,394,299) 7,526,906 15.2427 $ 493,804 $ 2,666,338

Total 189,375,668 (82,732,196) 106,643,472 (951,009) 105,692,463 (3,343,790) 102,348,673 (10,234,867) 92,113,806 (53,426,007) 38,687,798 14.51 $ 2,666,338

-43.69% 56.31% $ 7,284,257 $ ( 230,452 ) $ 7,053,805 $ ( 705,381 ) $ 6,348,425 $ ( 3,682,086 ) $ 2,666,338

Note 1: Soft Opening on March 15, 2015 with minor repairs pending at this time. Fully Repaired by April 1, 2015 6/3/2015 22 Claims Handling Accounting Lessons - Hurricane Odile B. Declared Values – One Solution: Improve Understanding & Increase Adequacy of Declared Values QLDG advocates the increased use in the Latin American Market of the “BI Worksheet” during the initial underwriting stage and as part of the underwriting correspondence. Advantages of using a B.I. Worksheet: 1) Improve Understanding - Includes a step by step guide and a set of instructions on how to Estimate a B.I. value for different industries. 2) Form may even included options for a Co-insurance factor (today known as “leeway”) to avoid the uncertainty of the forecasting process 3) The B.I. worksheet, not a 100% solution, but combined with sound legal advise it is another tool to bridge the Insured’s understanding gap and maybe increase premium dollars for the market. 4) A powerful tool, in the claim’s adjusting process, by providing insight as to how the insured declared the B.I. values 5) May add a layer of protection to broker/agent/consultant and even local insurance carrier against professional/errors and omissions liability claims.

6/3/2015 23 Claims Handling Accounting Lessons - Hurricane Odile Declared Values – One Solution: Improve Understanding & Increase Adequacy of Declared Values Disadvantages of the BI Worksheet: 1) Additional liability as insured’s with limited time to prepare declaration may ask broker to fill it out. 2) A BI Worksheet prepared without proper legal and the claim’s professional guidance may lead up to other misunderstandings by insured’s 3) Selective use may lead to claims by those that suffered a Average Clause Adjustment and were not provided with the BI Worksheet guidance when declaring their values.

6/3/2015 24 Claims Handling Accounting Lessons - Hurricane Odile C. Indemnity Period Repairs - Early Bird gets the worm!

Even after all of the CAT Planning - Limited Resources continue to be a significant problem for timely repairs.

I. Imported foreign resources are an option but many Odile insureds utilized local resources with excellent results.

In this CAT, Insured’s that started repairs immediately by mobilizing & housing the Mexican labor force on site, were able to secure the limited skilled labor pool and materials leading to quicker repairs, with significantly shorter indemnity periods than those that did not.

II. Ventures between Hotels and Mexico construction companies (arranged Prior to Odile) proved very cost and time effective than the use of foreign based imported resources or other locally arranged after 6/3/2015the storm. 25 Claims Handling Accounting Lessons - Hurricane Odile

New Lessons Learned from Odile Case Files

6/3/2015 26 Claims Handling Accounting Lessons - Hurricane Odile

New Lessons Learned from Odile Case Files:

I. QLDG has seen increased intervention of more Public Adjusters / Assessors & Claim Preparation accountants that in past years.

6/3/2015 27 Claims Handling Accounting Lessons - Hurricane Odile

New Lessons Learned from Odile Case Files: II. A great number of Hotels in Cabo are Not only Hotel operations but “Time Share” type businesses,

1) What are we paying for in a Time Share loss of sales/BI Value? 1) Lost Hotel Room night Sales? 2) A Sale of an Asset with a limited number of units and time availability? 3) A combination of both?

2) Fixed cost do continue but what about Net Income / Profit from the sale loss of a Time Share? Is the net income really Lost or maybe delayed?

3) Salvage value for indemnified Time Share sales lost during BI Period?

6/3/2015 28

Claims Handling Accounting Lessons - Hurricane Odile

New Lessons Learned from Odile Case Files: III. Odile had larger Number of Beach Front High Value Homes, Restaurants, Boutique Hotels with special circumstances. 1. Increased proportion of insured beach front properties in Cabo valued at over US$ 5 Million which are owned by foreign investors via “Fideicomisos” or Trusts so as to comply with Mexican Law. 2. Use of “Fideicomisos” or Trusts by Foreigners (to legally own beach front properties) increases repair cost by 16% (Trusts in Mexico are not VAT Rated). 3. Adjusters saw an increased number of US Insurance Policies working alongside a local policy to Insure High Priced Homes and Boutique Lodging that included Loss of Rents / Loss of Use and claim preparation coverages. 4. Increased numbers of Claim Preparation services than in other CATs.

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Claims Handling Accounting Lessons - Hurricane Odile

New Lessons Learned from Odile Case Files :

IV. Construction Methods in Baja California have not followed the Old Lessons of Hotels in the Post Caribbean CATS of the early 2000’s

1) Concrete is King but some seemingly modern structures clearly lacked the following of Hurricane Codes for windows and doors causing increased repair times.

6/3/2015 30 Tourist Hotel (MP) - In San Jose de Los Cabos

6/3/2015 31 Claims Handling Accounting Lessons - Hurricane Odile

IV. Construction Methods in Baja California have not followed the Old Lessons of Hotels in the Post Caribbean CATS of the early 2000’s

2) Even Modern Structures in Cabo suffered surprisingly serious damages.

Is there a need for increased risk inspections to meet the hurricane risks even for the most modern structures? (See Next Set of Photos)

6/3/2015 32 Modern Business Hotel in San Jose, Cabo Finished in 2013

6/3/2015 33 Same Hotel Hurricane Odile in 2014

6/3/2015 34 Same Hotel Hurricane Odile in 2014 Rear View

6/3/2015 35 Questions? Thank You for your attention