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To BI or not to BI - The case of Business Interruption Insurance


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Far too many Namibian businesses operate without a thought of what would happen if their business was forced to close – and stay closed – following a major loss.

While it is common practice (and common sense) for a business to insure properties, stock and equipment against the unpredictable nature of fires, natural disasters, burglaries and malicious damage, many business owners don’t give the same consideration to their profits. Which means if their business was forced to shut down for an extended period of time, it could actually put the owners out of business for good.
 
A sad fact to consider is that many businesses hit by major losses (up to 40%) never reopen after a disaster, and 25% of the ones that do fail within 12 months.
 
Enter business interruption insurance.
 
There are, however, some conflicting opinions around the value of business interruption (BI) insurance. Business owners see insurance in general as an expense, and BI insurance is often viewed an unnecessary add-on to existing premiums.
 
Small business owners in particular tend to want to keep their premiums at a minimum, and yet ironically, it is small business owners who tend to be wiped out after a significant loss because they are underinsured.
 
In fact, according to a recent survey 95% of small business owners are underinsured, some by as much as 30%. Which means if these businesses were ever struck by disaster, their livelihoods (and those of their employees) would disappear.
 
BI Essential to Business Survival?
 
Business interruption insurance is probably one of the most misunderstood insurance products on the market today. This is not because the concept itself is difficult to understand, but rather because the effectiveness (and thus the value) of BI comes down to how risk factors for specific kinds of businesses are assessed.
 
For instance, BI cover can be calculated in several ways, but is most commonly calculated by valuing a business in terms of gross profit, and then setting an indemnity period during which the business will be covered while it returns to a point of pre-loss profitability.  
 
However, this is an area where clients and brokers often butt heads.
 
One of the most persistent issues when valuing a business for BI insurance is the disagreement about what constitutes gross profit for a business, because accounting gross profit doesn’t necessarily equal insurable gross profit.
 
It is therefore essential that an accurate calculation of the client’s gross profit be carried out from the perspective of insurance before advising on the type of cover required.  
 
As well as the type of cover, another important factor when choosing BI insurance is considering a realistic indemnity period. While the typical recommended period is 12 months, many businesses take far longer to fully recover.
 
Claims take time to be processed, damaged equipment has to be ordered and delivered, new temporary premises have to be found and leased, and damaged buildings have to be rebuilt. All of these factors can take significantly longer to complete than is expected, during which a business cannot operate, and thus no profits can be generated.
 
Another factor to aware of is one hardly any business owners consider carefully enough: winning back customers. Even if a business becomes fully operational within the indemnity period, it may still take a while for turnover to return to normal.  
 
How Brokers Can Help?
 
Clients don’t always act in their best interest, especially when they are trying to control expenses. However, as a broker there are a few things you can do to ensure your clients get the cover they need:

  • Educate and get specific – Most clients don’t fully understand the implications of having their business operations halted for an extend period of time. For instance, how would they pay rent, honor contracts with suppliers, or cover staff salaries if their business suddenly shut down? Getting clients to think in concrete terms about the consequences of not having BI in can be effective in convincing them to protect their investment.
  • Do a risk assessment – One of the reasons clients who should have BI insurance don’t have it is because they are not fully aware of the risks to their business. Discussing the potential risks in the context of their business operations can go a long way to convincing a client to get the proper cover. This is especially effective if you serve a lot of clients in a particular industry, where you can compare and contrast businesses with BI versus those without.
  • Advise and diagnose – Traditional BI cover is not necessarily right for every kind of business. There are a number of different options, from simplified offerings for smaller businesses to options with very specific features and benefits to suit the type and size of a client’s business. There are also a number of extensions that can be added to a policy to customize it for a client. This requires you as the broker to assess your client’s business and match them with the appropriate cover.
  • Be clear – While this may seem like common sense, it is worth mentioning when it comes to advising clients on BI. It is vital that clients fully understand what is and what is not covered by BI insurance, and this is particularly important when discussing extensions and add-ons to a policy.

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