0299 AUR En Voyage Issue #18 Flickbook

whose business continuity
planning and management is such
that they will be very resilient to
a loss. For example, business that
are able to easily minimise the
impact to their business and might
simply require some additional
cash to put an established
recovery plan into action.
These costs may include staff
overtime, hiring temporary staff,
renting alternative premises and
advertising. No calculation is
required and the customer can
set their own sum insured based
on their assessment of the risks.
THE IMPORTANCE OF
INDEMNITY PERIODS
The indemnity period is the
period of insurance protection.
It normally commences from
the date of the event or damage
and normally ends when your
business is fully operational
again or when the specified
indemnity period has expired,
whichever occurs first. Indemnity
periods commonly start at 12
months and may be increased
to 18, 24, 36 or 60 months.
When setting an indemnity
period you must take into account
worst-case scenarios, which
includes taking into account a
vast range of circumstances that
can add significant time to an
organisation's recovery. Examples
may include, but are not limited
to; planning permissions and
associated applications and
objections, environmental issues,
lead times for replacing plant and
machinery, discovery of hazardous
material such as asbestos,
potential Health and Safety
enquiries, recruiting and re-training
staff and seasonality, meaning you
miss important trading periods.
Issues can easily arise that add
time to a business’s recovery and
it is not uncommon for a business
to start reinstating damaged
property six months after a loss.
In addition, people are often
overly optimistic about how
quickly their business will
recover to pre-loss levels and we
frequently see customers who
have chosen a shorter indemnity
period of, say, 12 months. In our
experience setting an indemnity
period of less than 24 months
is difficult to justify, although
there may be certain businesses
for which it is appropriate.
BI claims can span several years
and claim payments will cease
at the end of the indemnity
period, even if the sum insured
has not been exhausted, so
it is important the indemnity
period is set correctly.
SETTING THE SUM INSURED
Misunderstandings over how
to calculate gross profit are
one of the leading causes of
BI underinsurance. Confusion
over insurance terms and what
elements to include frequently
result in sums insured being set at
inadequate levels. As an example,
a BI gross profit figure is not the
same as an accounting gross profit
figure, which can lead to some
policyholders not insuring for
the correct amount. You should
therefore not just take the figure
from your annual accounts.
The insurable gross profit
figure is the net profit plus the
costs that continue when the
business is not operating and
the most common calculation
for insurance purposes is:-
Insurance Gross Profit =
(Turnover + Closing Stock +
Work in Progress) – (Uninsured
Working Expenses + Opening
Stock + Work in Progress).
An accountant’s gross profit
calculation will subtract any
cost that varies in proportion to
production; but for insurance
purposes they may vary in
direct proportion. This is a key
distinction and a source of
much underinsurance. Examples
include key staff wages, fixed
price materials under contract,
and other consumables.
You therefore need to ensure
that any costs that will continue
after a loss (partial or total) are
met under the policy and it is
therefore crucial to never exclude
an expense unless you are certain
it will cease in the event of a loss.
Consideration should also be
given to future business trends
and the gross profit sum insured
will need to be adjusted for that
length of time. For example, if the
business is predicted to grow by
20% over the next 24 months, then
the gross profit sum insured should
be increased to reflect this growth.
CONCLUSION
Whilst BI insurance provides
much needed cash flow to assist
a recovery, it is a complex area of
insurance and one that should not
be overlooked when purchasing
or renewing your insurance policy.
BI insurance should form part of
a wider business continuity plan,
which identifies the exposures
to the business and how you
would respond to a loss. Every
customer's resilience and postloss
actions will be different so it
is important that you liaise with
your insurance broker and spend
time with them to explain this and
you can work together to ensure
that the cover is adequate to meet
your needs should a loss occur.
At Network we have a team of
experienced professionals who
are able to meet with you at your
premises, or at our office on the
South Esplanade to understand
your requirements and build an
insurance solution unique to
you. Please contact us on 01481
701400 or pop into our offices
on the South Esplanade to find
out how we can help you.
Network Insurance, with you
every step of the way.
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