With the increasingly intricate division of labour and growth of industries, the importance of business interruption insurance or loss of profit insurance is growing in our modern, globalised world. People have now started to realise its importance, in fact, many experts now regard the loss of profit insurance as important as property or any other insurance for the smooth flow of businesses. The Global Risk Management Survey carried out every two years by a leading broker, also suggests that since 2007, business interruption or loss of profit has constantly been reported as one of the 10 risks to the businesses’ well-being.

There are numerous reasons as to why the loss of profit or business interruption has been on the high in recent years. The implications of business interruption losses have become increasingly far-reaching as a result of production trade flow, supply chain globalization, micro-economic and socio-economic trends. The lack of alternatives and the reduction of redundancies due to the increased specialization of companies have not only contributed directly to the loss of profit but also to its causes such as fire, machine breakdown, supply chain interruption, triggers caused by ongoing digitization, etc. Although these might not result in a direct material loss but might be a substantial contributor to financial losses.

What is the loss of profit?

Loss of profit means monetary loss caused to business or reduction in its profit margin due to interruption of operations or the costs incurred for the purpose of avoiding such losses and interruptions.

What is loss of profit Insurance?

Loss of profit insurance or business interruption insurance in simple words is a plan that is designed to help a business maintain its trading position in case the occurrence of any serious event disrupts its ability to trade or function as normal.

Usually, businesses take loss of profit insurance policy as an add-on to existing policies like property or premises insurance to eliminate the possible operational risk and financial risk. This is because while the principal insurance policy will help you recover from the occurred financial losses and reimburse you for the lost assets, they will not be covering your reduction in profits/increased expenditures. This is where the business interruption or loss of profit insurance steps in. It helps a business maintain its income when it is not able to operate in its usual manner right after an incident and also helps it to make a comeback to the same position it enjoyed prior to the calamity. The right loss of profit insurance policy can cover:

1. Loss of Gross Revenue or Profits:

It helps you cover up your loss in income and it can also help you pay ongoing rent, employee salaries, other fixed and overhead charges.

2. Increased Cost of Working:

 It can assist you with the additional charges you might have to face such as, renting an alternative premise, hiring temporary staff or arranging the necessary equipment’s to keep your business running.

3. Recovery Periods:

It is important to think of the time period that you might take to bring your business back on track and take up the policy accordingly.

Underwriter Considerations for Loss of Profits Insurance

As seen in the past few years the business interruption insurance for both commercial and industrial businesses have evolved from just being a cover that used to be neglected to a cover that is indispensable. Therefore, now its underwriting decisions carry more weight than they ever did in the past.

Here is a detailed list of considerations that are made by the underwriter during the issue of policies and examination for the insurance claims:

General Information:

General considerations include three main areas:

• Possible contingency losses
• Possible interdependency losses
• Scope of the business interruption insurance cover

A proper assessment includes the following information:

• Ownership information of land, buildings, equipment’s, inventories, etc.
• Business areas of the policyholder like trading, production, provision of services, etc.
• Gross profit of every business segment.
• Policyholder’s current financial situation including equity/debt ratio, liquidity, necessary costs of repayment, etc.
• The market presence, position, and development prospects of the company.
• Necessary approvals, certificates, licenses and more.
• The organizational structure of the company that includes decision-making, sales, production, etc., the interdependencies of these departments and their contribution.
• Buyer/ client structure of the company including the most crucial clients and their buying proportions.
• Supplier structure of the company
• Company’s import-export dependency of goods and services, its seasonal fluctuations.
• The policyholder’s willingness to ensure effective risk management.
• History of loss.
• Existing policies and preventive measures against insured risks.

Information on the Underlying Insurance Contract

• Basis of the current loss of profit insurance contract.
• The type of insurance policy.
• Risks covered
• Exclusion agreed upon.
• Loss of profits compensation based on gross profits, gross earnings, gross revenue, rent insurance and the cost of working insurance.
• Principle business interruption insurance sum.
• Development of the sum insured in recent years.
• Decided indemnity period.
• Decided extended liability period.
• The amount and type of agreed deductibles
• The limitation of liability.
• Other inclusions and exclusions like trade sanctions, etc.
• Interdependency and contingency losses to be included.
• Extent and type of coverage limit.

Information on the Company to Be Insured

• Address and location information of the business.
• Business areas, operations and facilities present on the premises, and their interdependencies.
• Organization of operations.
• The number of permanent employees and their ratio to the contractual employees.
• A generic description of the potential business interruption causes.
• The number of operating shifts and degree of utilization of the plant in the year.
• Existing assets prone to business interruption.
• Required rebuilding time for the damaged goods.
• Time required to reacquire the necessary licenses.
• Storage and duplication of important documents.
• Stocks of important parts and systems.
• The time needed for technical and commercial recovery.

Supplementary Information for the Companies with Multiple Locations

• Address of insured company and its branches.
• Hazard exposure of individual locations.
• Business interruption principal per location.
• Interdependencies between various sites.
• Potential backup possibilities and realistic assessment of alternatives specifying the turnover.

Once the considerations are examined carefully by the underwriter the insurance contract can be made.

For the right insurance solutions, contact Deinon Insurance Brokers LLC via our website https://deinon.ae/property/  or write to us at infra-energy@deinon.ae.

Stay tuned for our next blog in the series on “What will be the underwriter considerations under Escalation Clause”.