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Presented by Mark Roberton – Nexen Tom OLeary – FMC Norma Reimer – Trek Dont be Surprised by Actual Cash Value (ACV) 1.

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Presentation on theme: "Presented by Mark Roberton – Nexen Tom OLeary – FMC Norma Reimer – Trek Dont be Surprised by Actual Cash Value (ACV) 1."— Presentation transcript:

1 Presented by Mark Roberton – Nexen Tom OLeary – FMC Norma Reimer – Trek Dont be Surprised by Actual Cash Value (ACV) 1

2 Some ACV Background Historical form of Insurance Strict Indemnification Alternative Covers today – RCV – Guaranteed Replacement Cost – Stated/Agreed Value forms 2

3 Why Is ACV Relevant Today? Remains in virtually all policies as a Settlement Option When is it a settlement option? – When Insured chooses – When repair/replacement hasnt begun in timely matter Bottom Line… Risk Managers Need To Be Well-Familiar with ACV & when it should be used as an option! 3

4 Risk Management Issues Focus on the Cover in current policies – Fit with Actual Asset Replacement Plans? Replace v. Dont Replace v. Replace with Something Else – Talk to your Business Units!! – What should you actually insure? – Communicate clearly internally and with insurers Can Cover Be Amended? 4

5 Where Might ACV Be Used? Cant complete repairs on timely basis Would prefer the Cash – rather than repair/replace Company is Cash constrained (e.g. exhaust insurance available) Cant or Dont want to meet Specific RC requirements 5

6 ACTUAL CASH VALUE (ACV) Y ou may need to know… Disclaimer Not an ACV Expert Not representing Clients (past or future) Not representing my firm Maybe not even representing me (in the future) Any Resemblance to Real Life Is Purely Accidental! 6

7 Practically Thinking about ACV (Non-lawyer viewpoint) Does Actual Cash Value Define Itself? If ACV = Market Value Approach V. Fair Market Value V. Value to Owner V. How much would you Pay? 7

8 Practically Thinking about ACV (Non-lawyer viewpoint) Market Value usually = Fair Market Value FMV isHighest price available in an open market, between prudent parties both willing to transact, in terms of cash, at a point in time What about Value to Owner Considerations?? Refers to all economic (and non-economic) benefits that accrue from ownership – e.g. Owner may generate higher benefits due to personal contacts, etc. 8

9 Practically Thinking about ACV (Non-lawyer viewpoint) ACV = Replacement Value Less Depreciation? (but if its a partial loss maybe no depreciation – question is would the repair leave you better off?) Incidentally, What Is Depreciation? Is Depreciation the Flip side of Betterment? Maybe… 9

10 Practically Thinking about ACV (Non-lawyer viewpoint) Per Tom, Depreciation Is: Physical Depreciation (probably for sure) Sometimes Depreciation is broader and also includes: – Obsolescence – e.g. Functional (including technological) and Economic Obsolescence Sometimes Depreciation is spelled out 10

11 Actual Cash Value v. Replacement Value – An Illustration Replacement <Replacement of the Old > with New = (ACV) = (RC)

12 Actual Cash Value v. Replacement Value – An Illustration ReplacementReplacement of the old = (ACV)with new = (RC)

13 Going Through ACV Quantification Say you are going with this guideline: ACV = Replacement Cost Less Depreciation Functional, Technical, & Economic Obsolescence 13

14 Quantifying Replacement Value Lesser of: – Replacement Cost – Repair with Materials of Like Kind & Quality May need outside assistance unless you recently built a similar asset – Favourite/Likely Contractor or Engineering Firm – Not Free 14

15 Quantifying Replacement Value Dont forget the Soft Costs like… – Engineering and Project Management (outside) – Head office costs of project management Engineering Supervision Inspections QA/QC Safety Builders Insurance 15

16 What Depreciation Isnt… Accounting Depreciation – Or - Tax Depreciation! 16

17 What Depreciation Is – or – May Be… We can probably safely say Depreciation includes Physical Depreciation 17

18 Illustrations… Physical Depreciation 18

19 Quantifying Physical Depreciation Assuming you have a total loss… Consider the Whole Consider the Parts – are you really better off with physically new? Remember Not Accounting or Tax May need some outside assistance here – asset or equipment appraisers 19

20 What Depreciation Is – or – May Be… Depreciation May (but not necessarily) also include… – Obsolescence Technical Functional Economic What the heck are these things? 20

21 Illustrations… Technical Obsolescence 21

22 Quantifying Technical Obsolescence Consider Efficiency – better with old or new? Technological change does not mean technological obsolescence Consult your own Operators Is there Negative Technical Obsolescence? – New replacement requires other upgrades? – Old equipment was grandfathered 22

23 Illustrations… Functional Obsolescence 23

24 Quantifying Functional Obsolescence Can be thought of as Capacity and Capability Function or Capacity Not Being Used Or – No longer works Some Defensive Arguments: – Long term v. Current – Demand goes up and down – Frequent v. Infrequent – Still needed sometimes – Function was still valuable to potential buyer 24

25 Functional Obsolescence Contd For Help on Functional… – Start with the Operators (immediate use) – Go to the Higher Level/Strategic managers (longer term view & value to others) – Potentially go to appraisers 25

26 Illustrations… $$$ Economic Obsolescence$$$ Earnings? Fashion? Keeping-Up?

27 Economic Obsolescence More Externally-Driven Declines in Value -- Probably the most unclear… Does your asset make you money? Would your asset make someone else more money? Will your asset make more money than its replacement cost over time? 27

28 Economic Obsolescence contd Issues to Consider – Long term v. Short term outlook – Foregone long term opportunity – Cash flow sensitivities Who can Help? – Your companys economic/strategic planners – CBVs with insurance background 28

29 Conclusions Keeping alive the option to replace can be helpful Just being aware of the issues in adjusting ACV is half the battle! 29

30 ACTUAL CASH VALUE (ACV) Is recovery the same in these scenarios? Actual Cash Value Coverage Replace with new Walk away Replacement Cost Coverage Replace but not within provisions Walk away 30

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