Improper Benchmark
Firstly, thank god we have refund provision in Business Interruption policy !!
However, this will come to rescue where Sum insured opted was Over Insured only.
Sum Insured given by customer typically follow below funny interaction steps :-
What Sum Insured to be given for Next Policy Period of April-2024 to March-2025 ?
Our Audited Financials for Period Apr 23-Mar 24 will be ready by Sep-24 , ok then what sum insured taken in last year’s policy , Ok it was 72 Crs.
Our Apr 2022-Mar 2023 Insurable GP as per Audited Financials was 70 Cr , just add 10% cushion = 77 Cr Sum insured taken for upcoming Policy year 2024-25
Happy Ending right ?
In given above scenario Sum Insured Benchmark figures was based on last to last year’s financials.
However Correct Practice should be ‘Sum Insured should represent Projected Annual Gross Profit adjusted as per Business trend by taking into account Indemnity Period’.
The business interruption insurance policy covers the risk of “loss of gross profits” due to insured perils like fire, explosion, flood, storms, rain water inundation, earthquake, strikes, riots, terrorist strikes, etc. Specifically, the insurance policy pays for loss of Operating Profits that would occur due to :
A] Reduction in Turnover or Output :
and
B] Increase in cost of working incurred to avoid or minimise loss of Gross Profit as a result of damage.
Suppose there was loss in Last month of Policy period i.e. March 2025 and reinstatement expected in next 12 months to resume to the recovery period to reach the full capacity. Ask yourself is opted sum insured is enough to take care of this extreme scenario ?
As Best Practice, Gross Profit should be monitored regularly (at least every quarter) and if required Sum Insured may be increased during Policy Period.
Next part coming soon !!
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Blog written by
Prasad Ranjankar
Faculty - The Real Underwriter Insurance Academy