Decades of experience in quantifying Business Interruption claims enables C. Lewis to provide a unique insight to insurers, insureds and brokers focusing on providing accurate business interruption “Value at Risk Assessments” as well as detailed “Business Interruption Pre-Loss Analytics”, modelling an insured’s financial loss as a result of a hypothetical incident that interrupts business operations.
Business interruption underinsurance is a huge issue at every level of the insurance industry. Policyholders are required to declare values to insurers at renewal or inception of a policy for both Property and Business Interruption (BI). Typically, BI will request the insured declare their “Gross Profit”.
Misidentifying the correct parameters and cost types is one of the key reasons declared values on policies are inaccurate.
“Accounting Gross Profit” is set in accordance with either GAAP (“Generally Accepted Accounting Principles”) or IAS (“International Accounting Standards”). Both define strict definitions of what can and can’t be included within “Gross Profit” such that an investor can compare the profit and loss account of any two companies with confidence – for example a pension fund manager can compare the accounts of a technology company such as Microsoft with a manufacturer such as Coca-Cola on a like-for-like basis to allow them to determine which company to invest in. GAAP and IAS both demand that an element of wages is included within the gross profit definition even though those costs will behave very differently between the two companies. Microsoft’s wage costs are far more likely to be fixed (salaried) than Coca-Cola’s who may operate more flexibly or utilise zero-hour contracts within their workforce.
Insurance Gross Profit is defined within the policy wording, typically:
“The amount by which the sum of the Turnover and the amounts of the closing stock and work in progress shall exceed the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses”
In order to provide indemnity insurance, gross profit concerns itself with true variable costs – those that cease when there is an interruption to operations. It can be significantly higher than accounting gross profit and is the principal reason underinsurance occurs. This table shows actual data from over 5,000 claims assessed by C. Lewis in 2021.
On average, 48% of the claims assessed received just 54% of their calculated loss.
This means the 5,209 policyholders only recovered 78% of their calculated BI claims on average. Breaking this down further and looking at those 2,515 policyholders who were considered “uninsured”, the average “adequacies” are shown in this table.
“I bought insurance for £1m – Why am I only getting £250k?”
This is obviously a huge issue for Policyholders but it is equally a major issue for Insurers. Claims where such large deductions are made are much harder to settle. Policyholders do not understand and appreciate how and why they are underinsured. Brokers can also face potential PI claims if advice was incorrectly given. Insurers have the issue of having received the incorrect premium for the presented risk.
While not impacting the value of any claim settlement, the data also shows the issue of “overinsurance” – this table reflects the policies where the policyholders were not underinsured.
The 5,209 policyholders who were not underinsured purchased 460% of the insurance cover they actually required, as shown in the table. From their perspective, this obviously represents excess premium unnecessarily paid. From an Insurer perspective, expectation levels also become difficult to manage.
C. Lewis offer a bespoke, off-the-shelf “Value-At-Risk Assessment” that ensures the accuracy of an Insured’s BI declared value on their policy. This is of great benefit to Insurers, Insureds and Brokers alike and will help lead to quicker and more satisfactory claim settlements in the event of a loss for all involved and fair and accurate premium pricing in the event that there is no loss.
C. Lewis also offer a more thorough and detailed service which involves a full analysis of an Insured’s readiness and prospects in the event of an Insured incident. This review ultimately sets out a quantum measurement assessed against a hypothetical Business Interruption incident.
Claims are terrifying for Policyholders. While Insurers and Brokers will have experienced a claim scenario thousands of times, it may well be the first time an Insured or Risk Manager is going through the process. A C. Lewis pre-loss BI analysis is conducted working closely with Brokers and Policyholders to provide a comprehensive understanding of how the claim would be analysed and where there might be potential oversights if it came to claiming for a Business Interruption loss.
C. Lewis have sadly experienced many incidents while quantifying Business Interruption losses when they actually occur, where expectation gaps between the Insured and Insurers exist, often borne out of technical accounting issues. The pre-loss review is designed to narrow the expectation gap and ensure a much smoother and speedier resolution for an Insured’s Business Interruption claim, should it occur.
Please do not hesitate to contact us if you or your company require support from our expert team.
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