The evolving world of business interruption insurance

27 June 2017

Business interruption is a long-standing and critical cover which offers essential protection to businesses whatever their size, organisational structure or industry specialism. JLT are evolving and enhancing traditional business interruption products for all of our clients with a particular focus on those operating in the food and agri sector.

Business interruption (BI) insurance is by its very nature as complex and diverse as the businesses which it seeks to insure. 

Industry research* has found that only 30% of world-wide property damage and business interruption losses are insured. There are many reasons for the high percentage of uninsured losses globally (70%) which range from businesses not having insurance at all, predominately in emerging economies, to companies not buying the necessary limits or coverage extensions. 

Our view is that significant improvements to traditional business interruption coverage are needed in order to reduce the insurance gap and better align the performance of the insurance product with client expectations. 

The complexity and potential confusion surrounding business interruption policies were highlighted in a research paper entitled: Business Interruption Policy Wordings – Challenges Highlighted by Claims Experience. 

The paper was published by The Insurance Institute of London in collaboration with The Chartered Institute of Loss Adjusters in 2012, and five years later we are still trying to seek solutions for many of the problems highlighted. 

The paper said: “We all know what ‘contract certainty’ means technically – that there needs to be a policy in existence at the start of the insurance. But when it comes to BI, we think it would be a good idea to take the concept of contract certainty a little further.

Our concern is that there has been a lack of clarity for a long time now – for insurers, adjusters and customers – over certain aspects of BI policies. 

For example, there is often a big difference between the technical meanings for words in a policy and the way those words are used in everyday business. The way indemnity periods are worked out can be confusing and there are parts of standard BI policies that even the professionals have never agreed. In these circumstances, it’s hardly fair to expect customers to have the right answers.” 

Is there a simpler way to protect clients in our fast moving, consumer led economy?

Desperately seeking settlement

Most BI policies will indemnify insureds for a reduction in ‘turnover’ and the associated loss of ‘gross profit’. While seemingly simple, this has been a cause of confusion for years. The insurance market definition and the accounting definition are different and this discrepancy is often overlooked, leading to inaccurate limits of insurance. The knock-on effect is that policyholders may not receive a full indemnity in the event of a claim. 

Unfortunately the discrepancies between the practical application of insurance terminology and the outcomes which policyholders expect is often only realised when there is a loss, which will not be indemnified in full. 

In order to ensure that clients have an early warning of potential coverage issues, we strongly recommend that loss scenario testing is undertaken. We analyse how your BI policy would respond in practice to a loss, using theoretical but realistic loss scenarios to identify any gaps in cover and to test the adequacy of sub-limits. 

Completing this work before a loss happens enables clients to identify potential coverage issues and to deal with them accordingly. 

Trigger unhappy

Insurance policies, like most contracts, contain a variety of limitations and caveats. 

One caveat which is contained in most standard BI policies is the material damage proviso. This requires damage to property used being insured and the loss being payable. It is from this damage that the BI loss to be considered then flows. 

There are exceptions to this broad rule as BI policies contain limited extensions for when there is no damage trigger to property used. These include denial of access, loss of attraction, and other restrictions on the use of locations. However, such coverage has low monetary sub limits and may not cover the BI loss experienced in full.

Potential ways forward

We are designing insurance products which are altogether more straightforward and give clients more certainty in knowing exactly when their BI policy will respond. 

We would like to see a way in which front-end losses are defined, calculated and communicated in a straightforward way that is transparent for all involved parties. We are exploring ways of designing mainstream policies that respond to events that create a demonstrable loss, without a need to have suffered from a property damage event. 

We have engaged insurers to design BI insurance wordings where the total claims settlement figure would be calculated using a pre-agreed index matrix. Such an approach would provide certainty in the immediate aftermath of a loss, enabling insurers to readily understand the extent of their liability and insureds to determine the level of settlement they were due. 

Commentary

We work proactively to provide world leading risk management and risk transfer advice. This affords our clients with coverage certainty in the event of a claim. 

By using our in depth food and agri industry expertise and our strong relationships with the insurance market we will continue to create bespoke BI solutions to fit the evolving business and risk profile of our food and agri clients. 

The evolving world of business interruption insurance

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For further information, please contact Trevor Young, Partner on +44 (0)20 7558 3028 or email trevor_young@jltgroup.com

*Munich Re, NatCat service – January 2017, review of natural catastrophe losses.