Business Interruption Values
When faced with a catastrophic event—whether a natural catastrophe such as a hurricane or earthquake or a human-caused catastrophe such as an act of terrorism—having accurate business interruption values greatly improves the post-loss recovery process.
Accurate values can be critical to making informed decisions pertaining to the appropriate levels of coverage required and in identifying where a company should apply its resources in disaster recovery and business continuity planning. Further, organisations that consider redundancies and interdependencies in their calculations will be able to better convey their reasoning for values that might not conform to those that insurers typically expect. Ultimately, this will make for a more manageable renewal process.
Accurate business interruption values will also assist in refining the accuracy of CAT models by allowing for these models to be made more client-specific and/or industry-specific.
Calculating business interruption values and determining the amount of coverage required often leads to a great deal of confusion, misunderstandings and uncertainty. As such, we have provided some best practices when discussing the appropriate amount of coverage to be purchased annually.
BEST PRACTICES IN BUSINESS INTERRUPTION COVERAGE
We would suggest that, at a minimum, the following recommendations are considered:
- Consider the services of an expert to assist in preparing the business interruption values.
- Understand the reason(s) why the insurer requests a business interruption worksheet and how inaccurate values or insufficiently documented values could impact the process by increasing premiums and/or delaying the binding process.
- Review the profit and loss statement that supports the business interruption worksheet submitted as well as the profit and loss statement for the business that would be expected to have the most substantial impact if affected.
- Perform a cursory review of worksheet(s) to assess the reasonableness of values as compared to the gross profit/gross earnings.
- Discuss material differences between the overall gross profit/gross earnings and the value submitted on business interruption worksheet. All differences should be reconciled and explanations should be provided for material differences.
Use a structured approach, beginning with the client’s business interruption exposures based on original source documents (i.e. profit & loss statements) through the revisions including considerations for
- business continuity plans.
- disaster recovery plans.
- consultations with financial and operational personnel (i.e. redundancies, interdependencies, available inventory, potential bottlenecks).
and concluding with accurate and supported business interruption worksheets.
The above suggestions should not be considered all-inclusive and not all suggestions will be relevant to each individual organisation. However, a structured approach will allow for a better understanding of the business interruption values.