Insurance Appraisal GCC Presentation Autumn 16

Significance of Proper Asset Valuation in today’s
International/GCC Insurance Markets
Tony J Prior MIRM MInstPet
InfraConsult ARAS Limited
Presentation Autumn 2016
GCC Presentation Autumn 2016

Overview
 Introduction to InfraConsult ARAS Limited 3
 Challenges for the Insurance Market 8
 Construction and Equipment Cost Trends 17
 Valuation Solutions Property and Material Damage 21
 Business Interruption Cover and Gross Profit Definition 29
 Business Interruption Challenges 38
 Engaging a Valuation Consultant 46
 Contact Information 49
2GCC Presentation Autumn 2016

An Introduction to InfraConsult ARAS Limited

A truly professional service
Our aim is to be competitive, without sacrificing a truly Professional service.
We offer Appraisal & Valuation Services for Insurance Replacement and Asset Management.
Our staff are based in the UK, Europe and Asia, but we work worldwide.
The Team we have in place are all Senior Appraisers, with experience of a wide range of
industries and international assignments, including Oil, gas and petrochemicals.
We pick the Appraiser(s) with most appropriate experience for each assignment, ensuring
speedy and accurate completion, of both Site Surveys and Report Preparation.
in view of the experience, expertise and professionalism of our Consultants, we are able to
quote competitive fees, as assignments are completed swiftly and to a defined timescale.
We are an independent LLC, Registered in the UK

Experience
 Automotive
 Banking and Financial Services
 Pharmaceutical
 Food Industry
 Health Care
 Restaurants, Leisure, Hotels, etc.
 Renewables
5
 Oil & Gas & Petrochemicals
 Mining and Minerals
 Power, Water, Gas, District
Cooling, etc.
 Retail and Malls
 Iron, Steel, Aluminum, etc.
 Telecommunications
 Rail, Transportation, etc.

The Challenges for the Global and GCC Insurance
Markets

Insurance Practices:
 Regionalised Insurance Management
 Greater distance from physical assets
 Lack of commitment to the process at a local or plant level
 Lack of unified Global Policy
 Inconsistent Inclusions and Exclusions
• Site improvements
• Foundations
• Below grade assets
• Non-operational assets, etc.
7
Compilation of Insurance Value

Values reported in varying ways
Different concepts of Insurable Value
 Replacement Cost
 Net book value
 Book value
Different insurance value sources
 Recent or old Appraisal
 Direct reporting of cost from Fixed Asset Register
 Asset Value derived from acquisition of whole or part of the facility
 Staff estimates
 Standardised Property and Plant scenarios
8

Values reported in varying ways:
 Inconsistent accounting practices
 Local capitalisation and depreciation procedures
 Handled at plant, country, or regional levels
 Different cost centres, etc. from legacy companies
 Differing data formats
 Varying levels of asset detail
 Poor identification of assets
9

Accounting issues
 Treatment of transferred assets
 Current or past inflation strategy
 Values following acquisitions
 Values for asset impairments
 Assets not on the Register or misfiled
 Assets, removed but still on Register
 Original costs unknown
 Expensed assets
10

Technical data
 Size and construction details of buildings
 Poor construction cost information
 Overall plant capacities
 Production line capacities
 Varying rates of inflation for buildings and equipment
throughout the business
11
Insurance Value Reporting

Market Conditions
Still a “Soft Market” ?
Underwriters prefer well engineered/managed portfolios with:
 Good supportable values
 Accurate values for PML and EML
 Professional risk management data
 Current and appropriate Business Interruption data on both the limit and the
period of indemnity

Whilst property Insurance may be only one aspect of a businesses cover, the scale of
activities of many businesses are such potential losses could significantly impact the
future profitability and potential existence of the business itself
Accordingly it is important that the level of insurance cover is appropriate
The aim of a valuation exercise is to establish supportable opinions of value to enable
the underwriters to price the insurance coverage based upon the values and risks
involved
The development of a structured insurance appraisal program represents a quality
assurance process for the insurance function.
The benefits include the following:
 Helping to determine the adequacy of insurance coverage
 Establish appropriate allowances
 Assisting with Improved risk management – substantively verifying assets
 Improving risk marketability to underwriters
 Serves as a basis for the allocation of premiums to business operations
13
Insurance Value Reporting

Two major factors frequently influence the need to accurately determine and
maintain the values of insured assets:
 Continued investment across a wide range of locations or across many
business subsectors
 Increasing trends in construction costs, plus costs of general and
specialist plant and machinery
This is especially true across the Middle East, investment in new projects means
that many businesses add significantly to their insured asset base on an annual
basis.
The result is that the sums insured are rising sometimes rapidly.
Why Have a Valuation Program

Construction and Equipment Cost Trends

16
80
100
120
140
160
180
200
220
240
2000 2002 2004 2006 2008 2010 2012 2014
CostIndex(2000=100)
Year
CERA Capital Cost Index – Oil And Gas
Upstream
Refining
Petrochemical
Trends in Oil Gas and Petrochemical Costs

Trends in Building Costs
100
120
140
160
180
200
220
240
260
2005 2006 2007 2008 2009 2010 2011 2012 2013 (F)
Composite Building Cost indices
Bahrain
Kuwait
Oman
Qatar
KSA
UAE

Trends in Building Material Costs
550
650
750
850
950
1050
1150
1250
$/Tonne
Composite Carbon Steel Price

Valuation Solutions – Property and Material Damage

 Identification of high priority sites
• Based on value
• Risk profile
• Degree of confidence in existing values
• Sample sites by product
• Sample sites by business or region
 Appraise specific number of sites per year
 Builds a database for site comparison
 Update previously valued locations/businesses
20
Appraisal Programmes

Selection of appropriate valuation service level
 Fixed asset review with brief site inspection
 Macro asset listing by site inspection
 Detailed asset listing by comprehensive site inspection
 Business Interruption
21

Fixed asset review with brief site inspection
Equipment
 Requires accurate fixed asset list with true original costs
 manufacturer, model, serial number, original cost, year of
acquisition and location within the property/business
 Application of appropriate cost changes prior to site inspection
 Onsite limited verification of existence of significant assets
 Limited addition/deletion of assets based on findings
 Limited re-costing to validate changing costs
 Contents costs reported by building if identified in fixed asset
record, otherwise by overall site
22

Fixed asset trending with brief site inspection
Buildings
 Review of available as-built plans
 Measuring of dimensions
 Determination of primary construction components
 Building services, interior and exterior finishes, etc.
 Photographing each building
 Replacement cost developed using local construction cost resources
 Values and (COPE data if required) reported by building
 Land improvements (if required), parking lots, signage, outdoor
lighting, etc.
23

Macro Asset Listing by Site Inspection
Equipment
 Create new asset listing, grouped by production line
 Significant liaison required from local/corporate staff
 Production lines – product, capacity
 Replacement cost estimates working with local/corporate engineering
 Support equipment grouped by building
 Values reported by building
24

Detailed asset listing by comprehensive site inspection
Equipment
 Inspected and inventoried
 Asset Number, Description, Model Number, Serial Number and Manufacturer
 Predetermined equipment listing cut-off, suggested is US $100,000
 Logical production lines and single assets with replacement cost US $100,000 listed
 Asset below this cost grouped with like kind assets
 Assets re-priced using a variety of sources
 Values reported by floor by building
25

Business Interruption Cover and Gross Profit
Definition

Business Interruption Cover
Major Incidents often result in significantly more damage to a business
through loss of income, than in terms of direct property damage.
A BI Policy is intended to provide support to the Insured Business to
enable it to resume trading at the end of the indemnity period, in a
position no worse off than if the incident had not occurred.
The policy aims to:
 Recover the business as quickly as possible
 Enable the business to continue to trade through the disruption caused
by the loss
 Enable the business to retain its existing customer base

A BI policy is essentially an indemnity contract, whereby the business will
be restored to the same, but not a better trading position.
It is important to understand that the BI policies require more adaptation
to the specific business circumstances of the Insured than property
damage policies as an “off the shelf approach, rarely captures the
individual circumstances
BI Cover provides support to the business for as long as it takes to restore
the business to the pre-loss state.
In this regard the Period of Indemnity is critical as unless this is sufficient,
support for the business under the BI policy will end, before the
restoration of the business position is completed.

A BI policy should work alongside the property damage policy as the latter
is needed to ensure the assets physically lost can be restored.
Normally within a BI policy, the “Material Damage” clause will state
 A requirement for a policy covering the physical assets (even if not
insured directly e.g. leased buildings insured by the landlord) and
 For an incident to have taken place which is covered under the terms
of such a policy, in order for a claim to be made under the BI cover
The Policy wording is typically:
“ The insurers will pay the amount of any consequential loss resulting
from the interruption of or interference with the business carried on by the
insured at the premises consequent upon damage to the property”

Obtaining appropriate BI cover is frequently much more difficult than
property cover as:
 No two businesses are the same and therefore each risk and cover
is different.
 Businesses can have completely different business circumstances
and results, from the same set of assets.
 Identifying a potential/loss is difficult to identify and quantify.
 Establishing the appropriate cover involves analysis of financial data
which is not always readily available.
 Cover involves forecasting business activity, against the background
of sector and economic trends.
Essentially the aim is to assess the difference between the business if
the “damage” had not occurred and the business once the “damage”
has occurred.

As an example three types of business with differing circumstances,
where the assessment of potential loss involves differing challenges:
Growth Phase Companies
 Limits need to be established, based upon future growth forecasts.
Seasonal or Cyclical businesses
 The losses can vary significantly, depending on the point in the
cycle at which the loss occurs.
 Establishing an appropriate basis and period of cover, can be
challenging.
 An average can leave Insurer and Insured at risk.
Multi level businesses, with extensive interdependencies

It is vital not only to set a Period and Limit of Indemnity, but to
specify the constituent parts of a business that might be affected by
an interruption.
Global policies for larger businesses, tend to specify broad
definitions such as…
“All present and future activities….”
“Any premises owned, occupied or utilised…..”
For smaller businesses, the BI policy can be restricted to specific
activities and properties.
The onus is on the Insured to advise the Insurer of changing
activities.

Business Interruption Cover Common Elements
Amongst the most common elements covered under a BI
policy are :
 Gross Profit
 Revenue
 Loss of Fee Income
 Loss of Income
 Extra Expenses
 Increased Cost of Working
 Loss of Rent
 Loss of Debts
It is important that the cover fits the circumstances of the
business being insured.

Business Interruption Cover- Gross Profits
Gross Profits is the most common basis of BI cover,
especially for manufacturing and production businesses,
where a large element of the turnover comprises variable
expenses.
If the insured ceases to produce, the input of raw materials
and other variable costs will cease and the policy aims to
cover loss of profits and fixed (non variable) expenses,
which the insured will continue to incur.
Gross Profit is an insurance specific definition and should
not be confused with the accounting definition of gross
profit.

Business Interruption Challenges

Indemnity periods are Important
Cover ceases on the expiry of the indemnity period.
 Premiums are levied based on a multiple of the gross profit
and the indemnity period.
Many organisations make an “educated guess”, at how long they
would be disrupted following a major incident, without any real study
of the potential effects of major losses.
 Time to rebuild facilities
 Restart of supplier relationships
 Recovery of customers/sales
These “ educated guesses”, can be well short of reality and often
are for periods less than 12 months and hence the standard
indemnity period of 12 months often can seem “comfortable”.
36
Period of Indemnity

Manufacturing businesses usually have significantly longer indemnity
periods, when compared with service businesses.
Interaction between facilities within a group, or with key suppliers gives
rise to potential issues, in determining the Period of Indemnity and also
the overall indemnity limit.
Businesses dependent on “Just in Time “ supply or delivery chains, can
be fatally damaged in very short periods and accordingly very specialist
cover may be needed, as a 12 month standard indemnity period may
have no relevance – A maximum loss limit may be a more relevant
basis.
When setting an indemnity period, the “worst case scenario” should be
considered and the impact it will have on all aspects of a business, not
just the location directly affected by the incident. which prompts the
claim
Whilst there are many variables, a number of general factors should be
considered in determining an indemnity period, including….
37
Period of Indemnity

 Safety and Debris Removal - Time taken to make the site safe and
remove debris.
 Site Preparation - Time taken to repair/prepare site to accept new
facilities.
 Rebuilding Time – As a BI claim is triggered by a physical event, in
the form of a loss to insured physical property, the rebuilding time for
the physical assets is a critical item, in determining the Period of
Indemnity
• Within the overall rebuilding time, the replacement of any critical
items of equipment, which for manufacturing operations can be the
longest time factor, in restoring the business to normal operations.
 Retraining – Over a protracted rebuild period staff may be lost, or for
older facilities new control systems may be used, necessitating a period
of retraining for existing staff.
 Re-commissioning - Once completed, process operations may require
considerable periods of commissioning and subsequent approvals before
the products can be sold, (i.e. FDA)
 Return to Market position - The object of the cover, is to restore the
business to the same trading position as prior to the incident and
accordingly, a period will be needed to rebuild sales etc.
38
Period of Indemnity

On major process plants, the total Period of Indemnity needed can
routinely run to 36-48 months, especially if the process is highly
specialised and alternate sources of manufacture are restricted.
 Lead Times for Specialist Capital items between 2005 and 2009, for
example went from:
• HV Transformers 6 months - 12 Months
• Offshore Platforms 24 months - 48 Months
• Chemical Process Unit 18 months - 36 Months
 Restricted supply for large capital cost items, together with rising
commodity prices, can significantly drive up equipment costs and
lead times, with a consequent knock on impact, on the required
period of indemnity.
 Accordingly the Period of Indemnity should be regularly reviewed.
39
Period of Indemnity

To accurately assess the Limit of Indemnity a full financial review
needs to be undertaken of not only the past Audited Accounts, but
also the current Management Accounts and business dependencies
The review needs to look at the Gross Profit as set out in in the
Policy definition plus the many external factors, which can affect the
cover and the insured limits:
 Is the business dependent on specified customers
 Are the premises likely to be subject to Denial of Access
 Is the business dependent on externally provided utilities,
electricity, water, gas, etc.
 Is the business dependent on specified suppliers and are there
alternatives
 All the above factors combine to fix the limit and the cover for
the necessary extensions.
40
Limit of Indemnity

Gross Profits based policies are most appropriate for risks where a high
proportion of turnover is driven by variable costs, for example purchases
of raw materials.
Gross Profits is defined for insurance as:
 Turnover
 Plus Closing Stock and Work in Progress
 Less Variable Costs, Opening Stock and Work in Progress
This differs from the standard accounting definition of Gross Profits
which is:
 Net sales less Cost of goods sold or alternatively
 Net Profit Plus Fixed Costs
The most significant difference is in the recognition of “semi variable”
costs
41
Limit of Indemnity – Gross Profits

The most significant semi variable costs are
 Wages and Salaries
 Utilities
Wages and Salaries are considered a variable cost by accountants as
far as they relate to manufacturing staff. Whereas in the event of a
BI claim, unless there is a prolonged interruption, there is likely to
be an attempt to retain most if not all employees, to avoid undue
problems at the restart of activities.
Utilities typically consist of two elements of cost, a fixed, standing
charge and a usage based cost. In the event of a BI claim whilst
the usage element may be eliminated or reduced, standing charges
will remain.
In times of high escalation, one method of mitigating against
increasing energy costs has been to agree deals with an agreed
minimum purchase level. Here again the nature of these
commitments should be considered.
42
Limit of Indemnity – Gross Profits

Engaging a Valuation Consultant

Appraisal Benefits
The development of a structured insurance appraisal program represents a
quality assurance process for the insurance function.
The benefits include the following:
 Helping to determine the adequacy of insurance coverage
 Establish appropriate indemnity periods
 Assisting with Improved risk management
 Improving risk marketability to underwriters
 Serves as a basis for the allocation of premiums to business
operations

What to do when considering a valuation:
 Identify the availability of internal human resources
 Review the quality of data available within the organisation
 Look at the spread of the asset base (geographic, sector and risks)
 Look at external data sources to see what if any will help
 Look at external valuation consultants and discuss alternative
approaches
 Devise a valuation programme that meets your needs
 Set realistic objectives, timescales and budgets
45
Factors to consider

Contact Information
46
InfraConsult ARAS Limited Tony J Prior MIRM MInstPet
UK Registration No. 09433075 Mobile: +44 7917 307909
C/O Brennan Herriott & Co E-mail: tony.prior@infraconsult.co.uk
1 Blatchington Road 37 Woodruff Avenue
Hove BN3 3YP Hove BN3 6PH
United Kingdom United Kingdom
Phone: +44 1273 565393
Web: www.infraconsult.co.uk

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