When stakes are high and claims are layered and complex, insurers look to forensic accounting expertise to provide analysis, an independent review, and global coordination.
As published in LatAm Insurance Review, 6 June 2016.
When stakes are high and claims are layered and complex, insurers look to forensic accounting expertise to provide analysis, an independent review, and global coordination. From globalisation to catastrophes to underinsurance, there are a number of issues frequently tackled by forensic accountants when dealing with claims in Latin America (LatAm).
Evaluation of Business Interruption losses is a pivotal role many forensic accountants provide within the insurance sector. In recent years, LatAm has experienced increasing complexity in risks corresponding to products offered by the insurance market to cover various perils.
Globalisation, a world evermore reliant on new technologies, and growing insurance penetration are a few contributing factors to the exponential increase in complexity of risks within LatAm. This has resulted in policies such as Stock Throughput, Cyber and Product Contamination/Liability, among others becoming commonplace.
Often, only after an incident leading to a claim, is the true complexity of an Insured’s business fully appreciated.
The last year has seen its fair share of catastrophes throughout LatAm. However, despite the damage to residential properties, the impact on industrial locations has perhaps been less severe than it could have been.
For instance in 2015, on 16 September a magnitude 8.3 earthquake struck Coquimbo Chile and on 23 October Hurricane Patricia, one of the most intense tropical cyclones ever recorded, made landfall on Mexico’s Pacific coast. These events had a devastating humanitarian impact, yet the damage to industrial and commercial installations was relatively small, particularly when compared to events such as the Chile earthquake of 2010.
From an insurance perspective, the recent earthquake in Ecuador appears as though it may be the most serious catastrophe during the last 12 months; however, at the time of writing it is too early to tell the full extent of the commercial exposure.
The high risk region, already susceptible to natural disasters, which could potentially increase with climate change, underlines the importance of having adequate cover and the resources available to react swiftly should any catastrophe occur.
A common reoccurring theme throughout losses in LatAm is the presence of underinsurance. Around half of the Business Interruption cases we have worked on in LatAm have been heavily affected by underinsurance. This is typically the single biggest factor which results in the indemnity received by an Insured being significantly lower than the losses it has suffered.
Business Interruption cover will typically indemnify an Insured for its loss of gross profit resulting from an insured peril. Normally, the Sum Insured declared is based on a projection of the Insured’s gross profit over a 12 month period. If the Sum Insured is inadequate, the loss may be subject to pro-rata/underinsurance, where the Insured receives indemnity for a portion of its loss based on the proportion of its risk it has insured.
Often, the underlying reason for underinsurance is a misunderstanding of how Sum Insured should be calculated. For instance, an Insured may not be aware of the difference between accounting and insurance gross profit.
For accounting gross profit, production staff costs are typically direct costs which reduce the gross profit. However, for insurance gross profit, staff costs are usually fixed (they do not vary with sales); therefore, are not deducted in order to calculate insurance gross profit. If an Insured declares its accounting gross profit as its Sum Insured it may inadvertently be underinsured.
Other factors which can result in underinsurance include increases in commodity prices or reductions in the cost of raw materials, fluctuating exchange rates, and inconsistencies between the maximum indemnity period and the Sum Insured.
Local legislation may dictate that the Sum Insured must be based on a period of 12 months. However, an Insured with a maximum indemnity period of six months may declare a Sum Insured based on that period, resulting in 50% underinsurance.
It is in everyone’s best interest to ensure that the Sums Insured are adequate – so that Insureds have the appropriate cover for when there is a claim and underwriters are able to collect the premium which corresponds to the underwritten risk.
Complexity of risks, catastrophes and underinsurance are just a sampling of the issues that make claims analysis more challenging in Latin America and throughout the world. While every claim is different, a deeper analytical review can add value for all parties.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
*Effective December 2018, RGL Forensics joined Baker Tilly Virchow Krause, LLP. This article was published while we were RGL Forensics. The author(s) or team member(s) quoted from RGL are now employees of Baker Tilly.