Events like the global pandemic and the Russia-Ukraine conflict have led to substantial economic consequences for businesses in many sectors. The widespread global volatility1 impacts supply chains, labour costs, and inflation, creating a challenging situation for businesses.
This raises questions about how we can better understand these impacts, and how they will influence insurance programmes. There may be a need to reevaluate business interruption (BI) insurance values, and to potentially extend indemnity periods. For instance, if your property or contents, such as machinery and equipment, are damaged, will it take longer to source replacements? How would such a delay affect your trading results and the need for BI cover?
Why is BI insurance necessary?
BI insurance is vital to a comprehensive risk management strategy. Different types of cover are available, including loss of profits and extra expenses incurred if your business is forced to suspend its operations temporarily due to an unforeseen event.
BI insurance is closely linked with property insurance. The typical trigger for a BI claim is an insured property damage loss, such as a fire at the insured’s premises, or an extreme weather event, such as flooding damage to the insured contents. The BI consequences of such events can be financially and operationally devastating.
Exploring the benefits of BI insurance
Income protectionBI insurance can safeguard a company's income stream during disruption. This is crucial to maintain cash flow, pay your employees, and meet your financial obligations, even when revenue generation is temporarily halted.
Survival in a crisisUnforeseen events may require unplanned or additional expenditures in order to continue trading and meet contractual commitments. Purchasing extra expenses cover (also called additional increased costs of working) is generally a valuable addition to a BI policy.
BI coverage could help your company quickly resume operations and meet customer demands, minimising the risk of losing market share to competitors during downtime.
Customer trustMaintaining business operations, or quickly recovering from a disruption, can instil confidence in your customers and stakeholders. BI insurance helps protect the reputation and trust that your business has built over time.
Supply chain resilienceA disruption affecting your customers or suppliers can have a cascading effect on your business. In some cases, BI insurance can be extended to cover losses that result from damage to third-party premises forming part of your supply chain. This is a complex area that will require discussion with an insurance expert.
Optimising BI cover to build financial resilience
While BI insurance is essential, its effectiveness depends on how well it is tailored to your business's needs. An insurance expert can help you to assess your exposures and consider various risk management strategies. Here are some strategies to consider:
Accurate risk assessment
Carry out a thorough risk assessment to identify potential threats to your business. This includes assessing your supply chain's vulnerability, key assets, and critical functions. Understanding these risks allows for more precise coverage selection.
Check the accuracy of ‘gross profit’ values declared to your insurer
The insurance market definition of ‘gross profit’ differs from an accountant's. For example, BI policies often include salaries within the policy definition of gross profit because businesses typically will need to continue paying their staff even if trading operations are temporarily disrupted.
Importantly, the insurer will deduct any ‘uninsured working expenses’ specified in the policy from the gross profit claim. You must check policy definitions, amend these if necessary and possible, and ensure that any financial declarations or projections you give to your broker or insurer are accurate and based upon that agreed formula.
Adequate indemnity period
The maximum indemnity period in a BI policy is a highly important decision. It is typically expressed as the number of months following the date of loss, during which the policyholder can recover BI losses arising from a claim.
Your maximum indemnity period should be sufficient to allow your organisation to fully recover from a potentially catastrophic event. Remember, ‘recover’ includes fully rebuilding the insured property and resuming expected levels of financial performance. Every organisation is unique, and factors to consider include the potential for regulatory investigations, time to clear and remove debris, planning permission, lead times to replace equipment, and time to recover lost customers.
Ensure that the valuation of insured property and assets accurately reflects their replacement or repair costs. An undervaluation can result in insufficient coverage, while overvaluation leads to higher premiums. BI policies will not respond to the additional delays caused by under-insurance or the policyholder having insufficient funds to replace damaged property.
Consider extra expense coverage
You can add extra expense (additional increased costs of working) coverage to your policy to cover expenses incurred to speed up the process of returning to normal business operations. This can include the cost of temporary facilities, equipment rental, and fast-tracked shipping.
Review and adjust coverage
Regularly review and update BI coverage to account for changes in your business, such as expansions, new product lines, or shifts in supply chain dynamics. Ensuring that your coverage remains aligned with your evolving business is critical.
Regular reviews of financial projections and the broader risk environment, coupled with advice from an experienced insurance broker or agent, can help ensure that businesses have the correct cover to protect their operations.
- Review your existing BI insurance policy to ensure it suits your business.
- Identify potential BI exposures and evaluate the impact of each risk.
- Seek advice from an insurance broker, which can provide bespoke BI cover for particular needs, such as a dependency upon a key supplier or customer.
- Ensure the values declared to insurers are accurate, for instance, that gross profit values are in accordance with policy definitions.
- Evaluate the benefits of longer indemnity periods.
Broader coverage and longer indemnity periods typically result in higher premiums, but may provide greater coverage in the event of a disruption.
Business Interruption (BI) Insurance Review
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