Brokers often ask me which business interruption values at risk worksheets I prefer or think are the best. I guess the answer depends on if you want to use them to wrap fish or make paper airplanes. Aside from those two uses, they are all about equally worthless. I know this sounds harsh, but I have never, in 16 years of calculating business interruption losses, seen an adjuster pull out the VAR worksheet in order to adjust a business interruption loss.
Because the values at risk worksheet is not used to value a business interruption loss after an incident, why in the world would someone use it before an incident? The correct items to use to estimate business interruption values at risk are the following:
- a copy of the applicable policy.
- historical financial and operational data for the company.
- projected financial and operation results and plans.
- applicable industry and economic data.
The fact is that all businesses are unique and the VAR worksheets are generic. A few months ago a broker asked me to create a generic VAR model for moving and storage companies. The broker assured me that all of the businesses were “the same,” with the same operations, same margins, use the same software, and that there is nothing unique about any of the businesses.
I picked up two profit and loss statements, at random, from his desk. The first company makes 90% of its income from storage and 10% from moving operations. The second company makes 90% of its income from … you guessed it … moving operations and 10% from storage. They are businesses with two completely different risks and business interruption exposures.
I advise businesses to work with a forensic accountant with a vast amount of experience in business interruption claims to assist them in evaluating their business interruption values at risk. Business owners and managers can do it that way or they can roll the dice and hope, when the fire occurs, that the number generated on the worksheet was close.
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