Study 1 Introduction to Business Interruption Insurance Business Interruption Insurance

Objectives Explain the need for business interruption insurance and summarizes it benefits List typical business expenses Discuss the difference between the American and British approaches to business interruption insurance

Identify and explain the following terms or concepts –Direct and indirect losses –Coinsurance –Operating cost expenses –Variable expenses –Fixed expenses –Semi-variable expenses –Gross profit –Net profit Comment briefly on the rating of business interruption insurance

Introduction Direct loss and insurance are familiar Indirect loss and insurance are less familiar Misconception about business interruption insurance Analogy with personal risk – the Martins (Page 3) Alternatives given loss of income Loss of income could be serious

The Commercial Exposure Expenses paid out of revenues Remainder is profit Typical business expenses (page 4) Discuss ABC Company (page 5) Business will cease Financial obligations will continue Money must be found Alternative sources of money

Commercial Exposure Con’t Capital reserves Business may not return to normal immediately Other causes of interruption Physical damage insurance alone is not enough

All Businesses need some form of business interruption Insurance needs vary Examples page 7 Loss of customers A service or monopoly Skilled workers One supplier One customer Tenants forced by fire to move

Business Interruption Insurance; Forms and Terms Per diem Form Issued on a non valued basis Only a small part of BI premiums Two traditions American approach British Approach

American Approach Business is considered indemnified once the product and place to sell has been restored Gross earnings form Provides coverage from date of loss until repairs or replacement have been completed with due diligence and dispatch Once the insured can open for business the coverage ceases British Approach Interruption of business will continue after business has reopened Profits form Provides coverage from the date of loss until the business income achieves the level it would have achieved had no loss occurred.

Difficulties with the two approaches A new family of forms Policies unto themselves Focus on the business income model Specialized coverage Manuscript wordings

Terms Indemnity period Direct and indirect loss Coinsurance –Most fires cause partial loss –Many insureds would choose to underinsure –Coinsurance clause –Reduces premiums –Coinsurance penalty –Coinsurance formula –Applies at time of loss

Financial Terms Elements of cash flow Income Expenses Variable expenses Fixed expenses Semi-variable expenses Gross profit Net profit Basis of older forms

Rating Basic rate is usually the building rate – the 80% co insurance rate is normally used; the 90-% rate if the building is sprinklered. Some occupancies will use the contents rates instead.

Benefits of Business Interruption Insurance - Summary Provides income Avoids further debt or capital drain Makes bankruptcy less likely Pleases banks Keeps key personnel Enhances stock values Benefits government Provides employment

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