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By CYRIL TUOHY, managing editor of Risk & Insurance®

About 18 months ago, Dempsey, Myers & Company, a well-known risk management consulting firm, split into two companies; Dempsey Partners, under the command of John Dempsey and RWH Myers and Co., under the command of Bill Myers.

Cyril Tuohy: Has your focus changed much since leaving to create your own firm?

John Dempsey: The core of our business is still claims, and we've developed a couple of wrinkles on that service. The original business was loss accounting, assessing business interruption losses to corporations after a disaster. We try to help our clients project what their company would have done financially had the loss not occurred. But increasingly we found that clients wanted the same amount of care and service paid to the property damage loss.

CT: What does that entail?

JD: There are some instances in which it's as simple as tallying up the beans and assisting our client in submitting the claim, but we found that a lot of physical damage claims, especially the larger ones, are resolved based on replacement cost estimates. Take Harrah's Risk Manager Lance Ewing, for example. He had three casinos destroyed in the Katrina-Rita hurricanes, and none was replaced in exactly the same form as existed at the time of the loss. The only way to resolve those claims was to help Harrah's estimate the cost to replace "in kind".

So we advised Harrah's to hire engineers who could help them assemble estimates of what the replacement cost would be to repair or replace the properties as they existed before the loss. The carriers had already hired their own engineering experts. At that point what it comes down to is the team with the most detailed and credible estimates wins the day. As you can imagine, this exercise can get very technical, from talking about the price of concrete to labor rates and escalation of material prices. As a result of this and other similar significant losses, I realized that quarterbacking the scoping and estimation process is a vital service for risk managers. So we brought in Steve Kessler, and more recently Jeff Phillips, both with engineering and claims consulting experience, to assist the client's technical experts to help bring both sides together.

Identifying the scope of damage is the starting point for determining the period of business interruption. The business interruption policy covers the financial loss that occurs during the time it takes to fix the physical damage. The policyholder may think it's a year, but the insurer may determine it's six months. Our clients often make decisions based upon the amount of insurance coverage they will eventually receive. They need some certainty, and that means we have to help them identify areas of difference early on in the process and help them resolve them.

CT: What other tradeoffs are there that a risk manager needs to think about?

JD: Time savings versus the additional cost to reconstruct or repair damaged property. Consider a specialty piece of equipment, for example. If it would take six months to repair it versus bringing in a new piece of equipment that is available today, there is an opportunity for the client to get a new piece of equipment and for the insurer to save money on the business interruption side of the ledger. So it makes lots of sense for the client to spend more than the repair cost to get back in business sooner, which reduces the BI. Both parties win.

CT: What is the way to guarantee the most likely successful outcome of the claim?

JD: Doing the right things early in the claims process is the best way to help ensure a successful outcome. Before Steve Kessler joined us, we were just handling the accounting aspects of property damage claims. We weren't dealing with the qualitative parts of the assessment and policyholders were left to fend for themselves. Our role today is about creating a partnership with the insurance company. In the end it means fewer disputes and the policyholder will get their money faster.

CT: Do you work for the carrier or the insured?

JD: We work only for risk managers. Our goal is to help our client get the claims and the dispute settled. Our clients want a reasonable settlement in a reasonable amount of time. So we're constantly trying to perfect our involvement and participation in the process. What differentiates us is the ability to adapt to each claims situation to help our clients get paid as quickly as possible.

CT: Give me an example of getting payments faster.

JD: Well, we had a client with a large property and business interruption loss. The client was very focused on obtaining advance payments, as most companies are. But in this case, the client not only wanted timely advances, they wanted the insurer to acknowledge how much of the advance was property, and how much was business interruption, something insurers are often reluctant to do. We came up with a process that achieved this objective. The client was able to report more or less normal earnings during the periods it was interrupted, which is really what BI coverage is all about. It was a win-win because the insured was made whole on a timely basis, and the carrier was seen as a partner.

CT: I would imagine that went over well with the carrier and the insured?

JD: Indeed. I often hear risk managers say claims always take too long and they want a known outcome. That's the first thing on their mind. How long is it going to take and how much am I going to get?

CT: That's from the claims side. Now what about from the underwriting side?

JD: Jill Dalton, who heads up our risk consulting practice, is leading the charge in this area. With insurance companies not having investment earnings to fall back on theses days, it's important for them to have good underwriting. The carriers are demanding more and better data about business interruption risks and risk managers realize it is in their best interest to provide it. We developed a service called exposure value analysis (X-V Analysis) that takes business interruption values several steps further to answer the question, "How much business interruption loss would my company incur if a key facility, process, or supplier had a major disruption tomorrow?"

CT: What kind of work does that entail?

JD: The process mixes loss accounting, business model analysis, and supply chain risk assessment. It's a multifaceted, detailed exercise. We look at our client's business models, review their supply chains, evaluate any business continuity plans they may have, and ultimately quantify the likely amount of business interruption loss that would occur in the event of a major event. It's a good exercise for our client internally and also becomes a good team building exercise with the carriers, because everyone is on the same page. And it creates value because it helps risk managers make better decisions about structuring their property insurance programs. Some of our clients have saved considerable premium dollars after going through this evaluation, although that is not guaranteed.

CT: Does this work better in some industry sectors than in others?

JD: What's great about the X-V methodology is that it can be used to evaluate any industry and any aspect of the supply chain. We've done projects to evaluate the financial impact of flu pandemic, for example, or product liability. But most of our work involves more complex supply chain risks, like pharmaceuticals, technology, and manufacturing. We've also worked for airlines, hospitality, gaming risks, and financial institutions. But it can be used for any industry.

June 1, 2009

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