Do I need business interruption insurance?
All types of businesses can suffer interruption from natural or man-made disaster and may incur extra costs or have reduced revenue. Therefore, arguably all businesses should buy business interruption (BI) coverage and have business continuity plans (BCPs) in place to mitigate the risk.
If an interrupting event arises, the BI policy will first be used to meet the increased costs of working (ICOW), such as outsourcing or renting alternative facilities. These costs are incurred on the basis that it will minimise a claim for lost insurable gross profit (IGP). The policy tends to respond later to any IGP loss claim.
Businesses may buy cover on an ‘all risks’ or ‘fire and perils’ basis. The ‘perils’ aspect covers a number of specific perils with an exact definition in law so coverage is restrictive. All risks will cover most events – aside from stated exclusions.
How do I work out how much cover I need?
Typically mid-market businesses will insure their annual insurable gross profit (IGP) for a specified period: called the ‘indemnity period’. You need to make sure it covers the time it takes to get the business back on track. If the IGP was £10 million, for example, and it would take the business 18 months to get back to the position it would have been in without the loss, the sum insured is £15 million.
Extensions to the BI policy should also be considered. Examples are interdependency, additional increased costs of working (AICOW), suppliers, customers, fines and penalties, denial of access, infectious diseases and utilities.
What pitfalls are going to catch me out?
Pitfalls include: declaring an incorrect sum insured, buying too short an indemnity period, not buying the right extensions, not tailoring policy wording to the needs of a business and failing to tailor extensions to the exposure.
Many businesses declare a sum insured that excludes some fixed costs or includes variable costs. The result can be understating or overstating the sum insured, which may result in a claim being reduced or too much premium being paid. In terms of an incorrect indemnity period, even after your facility is reinstated your customers will take time to come back. Buying too short an indemnity period, can leave the business with a gap in their finances.
What are the implications of getting it wrong?
At worst, insolvency. In most cases businesses will incur unbudgeted costs, miss financial targets and have to issue profit warnings.
So how do I go about getting it right?
Take professional advice. We offer a BI health check service. This includes making sure the policy wording is tailored to the risk, and developing BI underwriting presentations that reflect the risk to the insurance market in a compact manner and in a way that gets you the best result. It also provides a BCP service.
Five tips on auditing a BI programme
- Know the BI risk, evaluate the exposure
- Don’t forget interdependencies or things that happen outside of damage to your property
- Contrast the exposure with current coverage
- Identify areas of inadequacy or over-purchasing – tailor coverage to your needs
- Obtain premium pricing for changes to cover
For further information, please contact Tim Cracknell, Head of Risk Consulting on +44 20 7558 3941 or email firstname.lastname@example.org