Business Interruption – how to do the sums accurately

At a recent Airmic Academy, Andrew King from Aon ‘s Claims Consulting and Risk Accounting practice took an audience of AIRMIC members through the importance of accurately calculating Business Interruption sums insured and tailoring policy coverage.  The workshop also explored the steps involved to successfully calculate and settle a business interruption claim.

Members were taken through the fundamental principles of Business Interruption insurance, what the purpose of the cover is and why it is so important. It is often the case that BI cover is sidelined and emphasis is placed upon ensuring that Material Damage cover is adequate at the placing stage. However it is not atypical for BI exposures to in fact be in excess of the Material Damage exposures in the event of an incident.

It is a very common occurrence for insured Gross Profit to be calculated incorrectly by being mistaken for the accountant’s definition of gross profit. This is due to the misunderstanding of uninsured working expenses and in the event of a loss this can leave the insured significantly underinsured, which can have detrimental effects on a business. Therefore, the workshop begun with an overview of the concept of insurable gross profit and its relevance in calculating appropriate declared values.

After taking attendees through typical uninsured working expenses, an activity was presented which presented the opportunity to calculate the insured rate of gross profit based on a snapshot of a profit and loss account.

The workshop provided an overview of the cornerstones of the BI cover and the considerations to be made when setting indemnity periods for both gross profit and additional cost exposures. The difference between increased Costs and Additional Increased Costs of Working was provided.

A breakdown of the key BI policy elements and definitions were provided, allowing attendees to gain a thorough understanding of the cover and how it responds in the event of a loss.

Attendees were taken through a Maximum Foreseeable Loss (MFL) scenario for setting limits of liability and clarification of clauses and extensions provided.

The latter half of the presentation moved on from the pre-loss emphasis and on to post-loss claim management techniques, covering the following;-

• Roles and responsibilities
• Management and planning
• Loss Mitigation
• Common claims calculation issues
• Achieving a maximised recovery within the terms of the policy

The last half of the session spent with attendees working through a case study ’Chicken Lickin’, based on a real life claim scenario of a food manufacturer providing chicken products. The tasks were to calculate the rate of gross profit, adjust turnover figures, and calculate the loss of gross profit and to recommend an appropriate period of indemnity. This meant that attendees the opportunity to put all of the theory presented into practice.

Business interruption is high on the radar of many business leaders.  Holding workshops such as these allows attendees to understand the challenges of calculating BI costs.  The feedback was incredibly positive resulting in additional calculation workshops to be held later in the year.