How Portfolio Companies Can Recover their Lost Revenue Due to a Weather Event

Andrea, Barry, Chantal, Dorian, and Erin.  These are the names that will be assigned to the next five Atlantic named storms.

Portfolio companies with locations that fall within their paths could be involved in the following unfortunate scenario:

• Several or all locations are shut down for an extended period.
• Loss of revenue results in all locations due to storm.
• Only a select few suffer direct physical loss.

Most people have never been through a complicated claim, and this is the wrong time for decision makers to learn what is and isn’t covered.  One thing that is universal is that a property insurance policy will only provide coverage for lost income for the locations that had direct physical loss. The other locations that were closed because of the weather event, but did not have direct loss, even though the weather event caused their location to shut down.

Obviously, all companies are concerned with lost revenue, but with significant debt to service this is a particular problem for portfolio companies.  Fortunately, a new product has emerged that addresses an insured’s challenges with receiving claim payment after an adverse weather event occurs whether there was direct physical loss or not. This table summarizes an insured’s pain points and explains how a new solution in the market is tailored to address them:

A Parametric Insurance policy is based on a weather-related index and typically has multiple triggers.  The underwriter “puts a ring” around locations and allocates a percentage of the total limit by location.  If the triggers are met, a claim payment is made in a few days.

No lawyers.  No inspections. No physical loss to the locations necessary.  No forensic accountants digging through your books.

You simply fill out a claim form that’s included in the policy and explain how you are going to use the payment.

Policy Trigger Examples

Here are some actual scenarios and claims triggers that were included on recent Parametric insurance policies:

• A coastal U.S. city was concerned about a reduction in tourism revenue due to a significant weather event. The same would also apply to a business concerned with a reduction in customer or patient foot traffic.
• Limit: 0MM
• Policy Trigger: CAT 3, 4, or 5 storm, coverage provided within a 20-mile ring of the location at 100% of the limit, and a 50-mile ring at 50% of the limit (the logic being that if the storm is >20 miles away the loss will be lower)
• A large U.S. city stockpiles salt each year to ensure continually clear roads across winter months. Average snow fall is approximately 40 inches across the season, however in 2013 there was a total of 87 inches. This resulted in disruption at a cost to the city of MM.
• Limit: MM
• Policy Trigger: Greater than 50 inches of snowfall, between November and March, across a major U.S. city.
• A large manufacturing company had to increase their wind deductible from 1% to 5% to reduce premium following Hurricane Harvey. The parametric policy would effectively buy their windstorm deductible down to zero, regardless of whether a CAT 3 storm causes damage.
• Limit: 5MM
• Policy Trigger: CAT 3 or greater storm, and 1 minute of sustained wind at greater than 111mph.
• A large distributor of beer and wine has noted that in 2009 a cold, rainy summer reduced their sales of beer nationwide by 15%. This resulted in a 0MM reduction in revenue.
• Limit: 0MM
• Policy Trigger: 10 inches of precipitation, between May and September, in California.
• A large maize producer in the southern U.S. had a low harvest of crop in 2010. No single cause was identified but the farmer concluded that highly variable temperatures and low precipitation were likely contributing factors. As a result, they were only able to sow 50% of their field the remaining season and are still recovering. This has resulted in a 00MM reduction in revenue over 8 years.
• Limit: 00MM
• A 25% reduction in crop yield compared to the reported 5-year average.

Underwriting Process

The underwriter’s only concern is the potential of the weather event occurring.  That makes this a purely data driven exercise based on information available for a given geographical area.

Because it’s a data exercise, the underwriter doesn’t require traditional property insurance items such as detailed construction information at the insured locations.  Whether the buildings are wood frame or concrete blocks is of no concern.  The underwriter needs the addresses and total insurable values by location.

Once the information is provided to the underwriter, the process typically takes two weeks to complete.

The market can go up to 00MM in limit for Agriculture risks, and probably get to 0MM by combining markets in non-Agriculture.

Coverage can be placed at the fund or portfolio company level.  If at the fund level, premium and claims proceeds can be allocated at the GP’s discretion.  We would “put a ring around” the insured locations and allocate a percentage of the total limit by location.

Virtually all insurance companies have good intentions when it comes to paying a claim, but they also have a responsibility to their shareholders to only pay claims that they are obligated to pay under the contract (the insurance policy).  Atlantic hurricane season began on June 1, so make sure that you understand your options if Andrea, Barry, Chantal, Dorian, or Erin make a visit to your locations.

Josh Warren is a Senior Vice President and M&A Advisory Practice Leader at ABD Insurance and Financial Services. Prior to joining ABD, Josh spent 15 years at Equity Risk Partners, an insurance brokerage and consulting firm that concentrated exclusively on private equity firms, venture capital firms, and family offices. Josh was twice named a Power Broker by Risk & Insurance Magazine in the Finance – Private Equity category. He was also named to multiple “40 Under 40” lists, including Business Insurance magazine, Risk & Insurance magazine, and the M&A Advisor. He can be reached at josh.warren@theabdteam.com or 312-300-5759.