Terrorism, Zika, CBI - Business Operations Impacted Without Physical Damage? Now What?

Introduction - Presenters

Todd Cheema Senior Vice President Senior Structurer Innovative Risk Solutions Swiss Re Direct: 212-317-5395 Email: Todd_Cheema@swissre.com

Drew Olson Managing Director Forensic Insurance & Recovery BDO Advisory Direct: 312-233-1826 Email: dolson@bdo.com

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Non-physical Damage Business Interruption

–  There are lots of potential coverages: •  Ingress/egress •  Contingent Business Interruption / Dependent Properties •  Civil Authority •  Loss of Attraction

–  And then there are others: •  Cyber Incidents •  Product recall •  Credit risk •  Reputational risk

–  What is next and how do you protect?

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Non-Physical Damage Business Interruption (NDBI)

Insurance solutions are being designed to cover BI from events that may not result from damage to insured property covered under traditional Property Damage and Business Interruption Insurance. !  These events are low frequency/high severity events (i.e. “Black

swan”) that can lead to a material disruption to earnings or solvency rating of the insured.

!  Recoveries can be on an indemnity or formulaic basis !  Coverage is usually written on a multi-year basis

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Examples Of Potential NDBI Triggering Events

!  Withdrawal of regulatory approval or license to produce (ie, due to quality problems or safety issues)

!  Closure of production facility by order of an authorized regulatory body

!  Credit default of (critical) supplier !  Failure of Internet access; software errors

and mistakes !  Cyber attacks (malware, virus, denial of

access, hacking, etc) !  Political risk events, including related

strikes, organized blockade, government actions, civil unrest or riot

!  Terrorism affecting trade in a wide area

!  Blackout (no electricity) !  Product recall !  Theft, corruption and other criminal acts !  Environmental contamination !  Pandemics (incidental cover) !  Transportation interruption causing

serious delay of delivery of goods or services

!  Natural hazards and other events affecting a wide area, regardless of damage to insured locations

!  Contingent business interruption due to non-physical damage affecting a key supplier

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BI Spectrum Generically, any trigger (named peril, hazard, occurrence, claim or event) could be used for a stand-alone insurance product. Cover is always subject to the following minimum conditions: !  NAMED TRIGGER: we clearly specify when and under what

future, unforeseen and unpredictable circumstances insurance kicks in (triggering a damage, physical or non-physical),

!  DAMAGE: The Insured, a (named) supplier or an end consumer (client of an Insured) suffers a physical or non-physical damage as a direct consequence of one of the defined triggers;

!  CAUSAL LINK: There is a causal link between the triggering peril, hazard, claim, occurrence or event and the damage suffered by the Insured, one of its (named) suppliers or one of the Insured's clients;

!  EXPOSURE QUANTIFICATION: The exposure is quantifiable (we need to be able to quantify the potential exposure based on actual loss history and/or scenario analyses, using Monte Carlo simulations and/or other acceptable methodologies);

!  LOSS DEFINITION: The damage and, as a consequence, our indemnity payment (loss of profit and extra costs) is quantifiable or our "loss payment" can be clearly quantified by a parametric approach; and

!  ALIGNMENT OF INTEREST: The interest between our client and us is aligned and excludes the moral hazard (manipulation) risk.

PushingTheLimitsOfInsurabilityPurposeofBIinsurance:Theindemnityfollowingtheinterrup>onismeanttoputtheinsured(asfaraspossible)intothesamefinancialposi>onastheywouldhavebeenhadtheincidentnotoccurred.

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Different Approaches to Indemnity

•  Traditional BI - Indemnity based on “Actual Loss Sustained.” –  Loss is based on a complex and lengthy adjustment process –  Qualifies for insurance

•  Parametric Solution – Indemnity based on event –  Indemnity based on objective measurement and formulaic pay-out –  Example: Cat-in-box –  Can be structured as insurance or a derivative.

•  Hybrid – Double Trigger –  Indemnity based on sequence of two or more objective events. For example,

1) certified act of terrorism as defined under TRIA law, and 2) Immediate decline in a publically available index (i.e. stock market) that is correlated to the insured’s business.

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Let’s take a look at some significant non-physical damage BI events in the last 3 to 4 years

–  Terrorist attacks in Paris and Brussels –  Zika Virus –  not-Petya Cyber Incident

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Top 10 Most Costly Terrorist Acts By Insured Property Losses Property Casualty 360 - As of 07/26/16

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Recent Major Terrorism Events Listing of Domestic & International Terrorist Attacks

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Contingent Time Element Coverage

This insurance covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured:

At direct supplier, patron or customer locations including the locations of subcontractors thereof, located within the TERRITORY of this insurance, during the PERIOD OF LIABILITY applied to such supplier, patron or customer location. Such locations are meant to include, but not be limited to the following types of facilities:

PatronFacili9es

! Conference / Convention Centers ! Civic Centers ! Sports Complexes ! Stadiums ! Theme / Amusement Parks ! Exhibition Halls ! Government Centers ! Medical Centers/Hospitals ! Business Office Parks

! Schools/Universities ! Museums ! Leader Properties: Leader property as used herein shall mean property not owned or operated by the Insured, which attracts business to the Insured within fifteen (15) miles of an Insured location which is not considered a supplier, patron, or customer facility as stated above.

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Zika – Background – Significant Financial Losses to Florida in 2016

•  CDC issued travel advice for pregnant women and their partners for portions of Miami from August 1, 2016 to December 9, 2016. –  Yellow cautionary areas advising travel only when needed –  Red advisory areas advising no travel

•  First time the CDC warned people not to travel to an American city for fear of catching an infectious disease.

•  Miami hospitality negatively impacted: –  Cancelled group events –  Loss of transient demand

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Ingress/Egress And Interruption By Civil Or Military Authority Coverage

•  Interruption By Civil Or Military Authority –  This insurance covers the Actual Loss Sustained and Extra Expense incurred by the

Insured due to the necessary interruption of the Insured's business due to prevention of access to the Insured Location by order of a civil or military authority, provided that such order is a direct result of physical damage, as insured under this insurance, to the type of property which is not otherwise excluded under this insurance situated within ten (10) miles of the Insured Location.

•  Ingress/Egress –  This insurance covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the

Insured due to the necessary interruption of the Insured's business due to prevention of ingress to or egress from a location of the Insured, whether or not the premises or property of the Insured is damaged, provided that such prevention is a direct result of physical damage of the type insured by this insurance, to the kind of property not excluded by this insurance occurring within ten (10) miles of the Insured locations.

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Zika - Coverage

•  Loss of Attraction Example 1:

–  This policy is extended to cover the actual loss sustained by the Insured resulting from cancellation of or inability to accept bookings for accommodation and/or a cessation or diminution of trade due to a loss of potential customers, as a direct result of:

(1)  The occurrence at an Insured location of murder, suicide, rape, attempted rape, armed robbery, malicious activities, contagious and/or infectious disease, food or drink poisoning, vermin, pests, defective sanitation, loss of satellite signals, pollution.

(2)  The outbreak of a contagious and/or infectious disease, the discovery of which causes restrictions on the use of that location on the order of the competent local authority.

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Zika - Coverage

•  Loss of Attraction Example 2:

–  This policy shall extend to insure loss of business as direct a consequence of: (i)  Infectious or contagious disease manifested by any person while on the

premises of the insured; (ii)  Murder or suicide occurring at the premises of the insured; (iii)  Injury or illness sustained by any person arising out from or traceable to foreign

or injurious matter in food, drink, or air, on or within the premises of the insured, or the threat thereof;

(iv)  Closing of the entire or part of the premises of the insured by order of public authority based upon the threat or existence of hazardous conditions either actual or suspected at the insured premises.

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NDBI Example: Hospital System – Cyber Attack To Be Updated

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NDBI Example: Hospitality Industry What makes it special? !  Covers loss of income due to defined events including

Transportation Interruption, Certified Terrorism, Infectious Disease

!  Protects the income statement against several “black swan” events.

!  Double trigger due to defined event and decline in RevPar index.

!  Formulaic pay-out in event of loss based on annual drop of RevPar applied against hotels actual experience.

Basic Details !  Policyholder: Hospitality REIT !  Scope: Multi-peril; including Transportation

Interruption, Certified Terrorism, Infectious Disease

!  Term: 36 months !  Coverage: USD 75m with reinstatement.

Pays proxy loss of income due to defined perils and reduction in RevPar

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NDBI Example: Pharmaceutical What makes it special? !  Covers loss of income due to withdrawal of

regulatory approval at key suppliers and/or credit default of supplier

!  Reinsurance of captive insurance company. Captive has a large self-insured retention.

!  Gross profits coverage for 12 months indemnity period.

Basic Details !  Policyholder: Pharmaceutical Company !  Scope: NDBI world-wide cover !  Term: 36 months

!  Limit of Liability: 75m USD annual aggregate

Questions??? Thank You!!!