Energy crisis, climate change, geopolitical crisis – you have only to scroll through news articles to see why business interruption (BI) insurance is now more crucial than ever.
Yet, gaps in insurance cover are often discovered only at claims stage, says Yolenda Makhatini (pictured), a financial risk consultant at Aon South Africa. For many organisations, it is only at this point – when faced with a financially crippling event – that the real value of having a professional broker and risk adviser on their side comes to light.
“Planning for worst-case scenarios starts with a thorough understanding of how loss-adjusting works and structuring business insurance covers that are optimised to afford your organisation the best outcome following an event that interrupts business operations,” Makhathini says.
Calculating the right amount of insurance cover for a business requires a thorough understanding of its risks, assets, liabilities, and financial needs. And the bigger and more diverse the business, the more complex the exercise, she says.
“It is also wise to look beyond the premises owned or occupied by your business to include those of suppliers and/or customers, taking into account the impact of major service providers on the business.”
Conduct a BI review
Makhatini suggests doing BI review to estimate the right amount of insurance coverage required.
1. Assess business risks
Start by identifying the BI risks the business faces, such as catastrophic events, property damage, liability claims, cyberattacks, and supply chain interruption. Consider the likelihood and severity of each risk and how it could impact the business financially. The overall claims history of the business should also be reviewed to identify risks.
2. Review financial information
This considers the extent to which values should be adjusted to reflect the potential for revenue volatility during evolving macroeconomic conditions, such as a recession or a period of rapid growth. Furthermore, it involves determining the appropriate level of BI to declare for insurance purposes based on a reliable methodology to calculate BI that can be applied annually.
3. Consider revenue and expenses
Evaluate business revenue and expenses, including salaries, rent, utilities, and other operational costs. This will help to determine how much coverage is needed to protect cash flow and profitability in case of BI.
4. Changes in operations
If the nature of business operations has changed, such as adding new products or services, or expanding into new markets, insurance coverage may have to be adjusted to ensure adequate protection.
5. Business growth
If the business has grown significantly in terms of revenue, employees or assets, an increase in insurance coverage may be needed to reflect the increased risk exposure.
6. New regulations
If there have been changes in regulations that affect the industry, insurance coverage may have to be updated to comply with new requirements.
7. Supply chain
Changes in the supply chain or any supply chain pressures have a fundamental effect on a business. Insurance coverage needs to reflect these changes from a risk perspective.
8. Adequacy of the sum insured
Ensure you are not over-insured (paying more than you need to) or underinsured, which could leave you out of pocket during the claims process.
9. Interruption period
Ensure there is enough cover for the entire period that the business may be interrupted.
“Calculating the correct sums insured on your BI insurance can be a lengthy and involved process, so it is advised to give yourself and your team ample time to work through the process to establish the exact amount of BI cover that your business needs when faced with a worst-case scenario,” she says.
How often to review BI cover
BI policies are generally renewed annually. Based on market trends and risk developments in the face of ongoing macroeconomic and political volatility across domestic and foreign markets, many insurers are making changes to their policy wording, adding restrictions, or omitting some lines of cover altogether – for example, risks related to a pandemic and electricity grid collapse.
Makhathini says this trend means policy renewals require more time to evaluate and finalise, particularly where alternative coverage solutions need to be found in the market or risk management measures must be put in place.
“Give your broker and your organisation enough time leading up to an insurance policy renewal to do a detailed analysis of your business insurance needs to put the best covers in place,” she urges.
