At a glance
- Business interruption (BI) is a complex area – mistakes are common, and experts suggest that around 40% of policies are thought to be underinsured
- The free Business Interruption Calculator offers a simple way to set adequate cover levels, evidence compliance and grow your book of business
- Using this free tool entitles customers to a 10% discount on their BI premiums
This article counts towards accumulating your annual CII CPD structured learning hours for Business Interruption and Underinsurance.
By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Identify one or more of the most common causes of underinsurance on business interruption policies.
Visit the CPD Hub to log in and begin accumulating CPD hours.
Business interruption (BI) is a complex area of insurance, which requires a good level of understanding to achieve the right outcomes for customers.
In this article, we explore six issues brokers may experience relating to BI, and explain how the free Business Interruption Calculator (BI Calculator) offered by LMI Group, can help to address them.
1. Gross profit definition and calculation
Confusion over terms such as ‘insurable gross profit’, and decisions such as whether or not to insure wage roll, frequently result in sums insured being set at inadequate levels.
BI Calculator helps to avoid these problems by taking you through simple step by step input screens to arrive at a guide sum insured; crucially, it adapts to your customers’ policy wordings and business description.
Each screen includes a clear explanation of what information is required, accompanied by a detailed glossary of terms and an extensive resource library.
The tool is also flexible – brokers and customers can either choose to complete it online, or brokers can print a short data capture questionnaire to be sent with proposal forms and renewal letters.
2. Uninsured working expenses (UWEs)
UWEs are a fundamental part of the gross profit calculation, but can be a difficult concept to grasp.
While a standardised approach is often taken, which routinely specifies items such as ‘purchases’ and ‘production wages’, this is susceptible to errors, and great care must be taken when subtracting UWEs from sums insured.
BI Calculator eliminates the risk of such mistakes by requesting that UWEs be specifically inputted and giving detailed guidance on how to identify them correctly.
3. Inadequate indemnity periods
BI cover ends when the maximum indemnity period expires. It is therefore critical that indemnity periods are adequate and account for the wide range of circumstances that could delay a customer’s recovery.
Inadequate indemnity periods are a frequent cause of underinsurance, and it can be challenging for brokers to educate customers on why they should consider longer periods.
BI Calculator helps by including simple guidance on setting indemnity periods, including a range of estimated timescales for typical stages of a BI claim (see boxout for examples).
Another common source of underinsurance is a failure to adjust sums insured in line with changes to the indemnity period – the BI Calculator does this automatically.
4. Not adjusting for business trends
BI claims can span several years, so it is important that cover is adequate for both current and future circumstances.
The BI Calculator makes this easy by asking customers for their business’s growth estimates over three defined periods, and adjusting their sum insured accordingly.
5. Compliance and the risk of litigation
Whether or not a customer fully recovers following a major loss often hinges on the adequacy of their BI cover.
Brokers risk litigation against them should a customer’s cover be inadequate.
Underinsurance is also a major focus for the Financial Conduct Authority, making it increasingly important that brokers are able to demonstrate what action they are taking to protect their customers.
Using the BI Calculator is an easy way to show how you are helping customers set adequate sums insured. The tool also provides a simple record that can be put on file to evidence compliance.
6. Target area for attacking brokers
BI is a prime target for rival brokers, who may seek to expose mistakes in how sums insured and indemnity periods have been calculated.
Checking your customers’ BI coverage with our free calculator reduces this risk, by helping you to identify any inadequacies early and demonstrate your proactive approach to their risk.
For brokers seeking to increase their book of business, the tool is equally valuable, as it can quickly identify potential inadequacies in prospective customers’ cover.
10% discount for customers
With around 40% of BI policies thought to be underinsured, setting sums insured at their correct levels may result in higher premiums for some customers.
In recognition of this, we are offering a 10% discount on BI premiums for both new and existing customers who use the sum insured the BI Calculator produces at renewal or inception of their policy.
Now available to customers big and small
We initially launched BI Calculator with mid-market corporate customers. Following such positive feedback and demand, we are pleased to announce that this invaluable tool is now available for all nonpackage business with turnovers up to £100m.
“With smaller customers, it can be difficult for brokers to dedicate the time needed to thoroughly check BI cover levels,” explains Mike Green, Underwriting Manager at Zurich.
“This free tool now offers brokers a simple way to significantly increase the level of assistance they offer their customers, regardless of their size.”
To start using the BI Calculator today, or for more information on anything discussed in this article, please speak with your local Zurich contact.
Indemnity period timescales
Choosing an adequate indemnity period is critical to the survival of your customer’s business following a major loss.
Below are some indicative timescales for typical stages of a business interruption claim.
Weeks Item 6 Insurers to complete investigation and admit liability 3 Demolition/debris removal 3 Engineering assessment and municipal plan submissions 6 Council approval 26 Minimum lead time for replacement plant/building repairs 6 Shipping, installation of plant/building repairs 2 Commissioning plant/building repairs 5 Remanufacture adequate stockpile 18 Recovery of lost market share Total 75 weeks
Source: LMI BICalculator