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Business Insurance
Friday, February 1, 2008
Poor practice

In an article that recently appeared in “The Journal”, the author Kevin Pratt, stated that around 20% of businesses in the UK suffer a major loss every year and that 80% of such businesses closed down within 18 months. Research further indicated that 90% of businesses that lose their data close down within two years.
Comments Gene Fivaz, director of Fivaz, Ogle & Associates (Pty) Ltd, “Judging from sums insured and indemnity limits nominated in South African insurance policies viewed recently in claim matters, we were shattered to find that the actual asset values and the financial impact on the insured party bore little resemblance to the sums insured nor the indemnity limits noted in the policies.
“In most cases the insured party’s were severely prejudiced by the application of average (under-insurance) and inadequate business interruption (loss of profits) cover. It is obvious that many brokers (and direct insurers, where they take on the role of insurance advisors) appear not to be interacting professionally with their insured in:
• analysing risks;
• doing scenario planning in respect of the reinstatement of the business following a major loss; or
• testing the validity of fire sums insured in terms of reinstatement value conditions which are applicable, at the time of a major loss.

Nobody benefits from the demise of a business due to a catastrophe or a major loss. The negative impact is far reaching and extends to owners, shareholders, employees, banks, suppliers, customers, brokers, insurers, local business community and other stakeholders.
Mr Fivaz says the investigation into the impact (time and financial) of a catastrophe or a major loss suffered by the Insured party, is a vital function of the broker or the direct insurer, as the outcomes, are reflected in establishing the client’s sums insured and the indemnity periods nominated under the business interruption section of the insurance policy.
“Establishing the proper values at risk and financial impact of a major loss are paramount to providing correct advice and adequate cover,” he adds. The new buzz term for the procedure is Business Continuity Management (BCM).
It is a broker’s or direct insurer’s duty to explain to the insured party the terms and conditions of the material damage insurance policy, as well as the business interruption policy, and in particular, the meaning and where required, the (insurer’s) calculation of:
• Net profit
• Standing charges
• Uninsured working expenses, variables and specified working expenses
• Insured gross profit (as opposed to accounting gross profit)
• Indemnity period
• Average
• Rate of gross profit.

It is important that the insured party, together with the broker or direct insurer, compile a BCM plan that should include inter alia;
• Insured premises
• Potential impact of a major loss on sales or turnover
• Recovery period
• Alternate premises
• Alternative sources of supply
• Reinstatement value of buildings (At the time of the loss)
• Reinstatement value of plant and machinery (at the time of the loss)
• Trading, expenses and other trends such as business development  trends
• Impact on the insured business of major loss at a key supplier or key customer
• Impact on the business of major loss arising from a supply failure by public utilities
• Impact on the business of major damage to infrastructure in the vicinity of the business which prevents or impedes access, to the business.

“The business continuity management plan should be reviewed at regular intervals,” adds Mr Fivaz, “particularly at the time of substantial changes in costs, for example, as regards fuel, power, raw materials, building costs, wages, and foreign exchange rates.
In closing, a word of caution: “Leaving the calculation of the insured gross profit to the insured’s accountant could be a recipe for disaster, unless the broker or direct insurer is confident that he is familiar with the insurance covers, the terminology and requirements of the policy,” he says. The extract is probably best carried out by the broker or direct insurer or, in conjunction with the accountant.

Copyright © Insurance Times and Investments® Vol:21.1 1st February, 2008
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