Study 1 Introduction to Business Interruption Insurance

1. Business Interruption Insurance Study 1 Introduction to Business Interruption Insurance

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. American Approach 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. • 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

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

11. 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

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

13. 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.

14. 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

15. The End……………… Questions????????????????? Discussion>>>>>>>>>>>>>>>>