Flop fire loss of profit insurance
- 1. CONSEQUENTIAL LOSS / BUSINESS INTERRUPTION/ FIRE LOP Vimal Goyal FIII, ACII (London), Chartered Insurance Broker. [email protected] [email protected] [email protected] Cell 098996 99304
- 2. Type of Policies and Clauses Rating Factors What Is not Covered Working of Claim Amount Understand client’s needs & objectives Underwriting Considerations Working of Sum Insured & Premium
- 3. CLIENTS NEED & OBJECTIVE If there is loss by insured peril say Fire Earthquake They may be reduction in turnover Thereby loss of the anticipated gross profit and fixed costs which are to be incurred irrespective of the reduction in the level of activity. Sometimes, material damage may be minor but production / turnover may be interrupted for a long period. Example imported machinery, customized machines. Resumption of production may take a long time. Consequential loss policy provides indemnity for such loss of gross profit due to business interruption. The additional expenditure incurred for avoiding or reducing the reduction in turnover during the interruption period is also taken into account.
- 4. CLIENTS NEED & OBJECTIVE Protection under Material damage Cover is not full Business need to be conducted on the basis of planned security rather than basis of chance Preservation of financial structure against effect due to disorganization of business following damage Security of Trading Results Deterioration of financial position might result into deficiency of working capital Inadequacy of cash flow Liabilities during reinstatement period Extra expenditure in attempting to maintain turnover Speeding up the process of recovery .
- 5. The Top 10 hotspots Material damage proviso Sum insured Definition of gross profit Indemnity period Policy type • Increased costs of working • Locations at risk • Policy extensions • Perils • Insurable interests
- 6. SUBJECT MATTER • FIRE POLICY : MATERIAL PROPERTY • LOP : BUSINESS OF THE INSURED, EARNING CAPACITY • DAMAGE TO PROPERTY LIKE BUILDING, MACHINERY & STOCKS • INTERUPTION TO NORMAL BUSINESS ACTIVITY : TOTAL OR PARTIAL REDUCTION IN OUTPUT / TURNOVER REDUCTION IN PROFIT INCREASE IN COST OF WORKING
- 7. WHAT IS INSURED ? • GROSS PROFIT STANDING CHARGES NET PROFIT INCREASE IN COST OF WORKING
- 8. PERILS COVERED ALL PERILS AS COVERED UNDER THE MATERIAL DAMAGE POLICY : ADDITIONAL PRERILS IF COVERED UNDER FIRE POLICY MAY BE INCLUDED (OPTIONAL).
- 9. UNDERWRITING CONSIDERATIONS (other than Petrochemical risks) OCCUPATION PHYSICAL HAZARDS IMPORTED / MADE TO ORDER MACHINES INDEMNITY PERIOD SUM INSURED PAST HISTORY OF CLAIMS / EVENTS ADD ON COVERS MORAL HAZARD / GENERAL REPUTATION OF INSURED OTHER INSURANCES / POTENTIAL
- 10. PERIOD OF INSURANCE PERIOD OF INSURANCE: THE ANNUAL PERIOD DURING WHICH THE INSURANCE COMPANY BEARS THE RISK e.g. 01.07.2011 to 30.06.2012 INDEMNITY PERIOD: REPRESENTS INSURED’S ESTIMATION OF THE MAXIMUM PERIOD REQUIRED FOR NORMAL BUSINESS OPERATION TO BE RESTORED FOLLOWING A LOSS (if indemnity period is 9 months and loss occurs on 30.6.2012, the indemnity period will be 30.6.2012 to 29.1.2013) TO BE DECIDED AT THE TIME OF INCEPTION
- 11. INDEMNITY PERIOD CAN BE ANY PERIOD BETWEEN 3 MONTHS TO 36 MONTHS e.g. if insured opts for a I.P. of 24 months and the loss takes place on 30.6.2011, the maximum period of interruption insurer can pay is upto 29.6.2013. INTERRUPTION PERIOD: ACTUAL PERIOD OF INTERRUPTION STARTING FROM THE DATE OF LOSS/ DAMAGE TILL THE DATE NORMAL OPERATION HAS BEEN RESTORED. CAN BE MORE/LESS THAN THE CHOSEN INDEMNITY PERIOD - BUT INSURER’S LIABILITY IS RESTRICTED TO THE LOWER OF THE TWO.
- 12. RATING FACTORS PREMIUM RATING DEPENDS ON : AVERAGE RATE APPLICABLE TO THE CONTENTS OF THE PROCESS BLOCKS OF THE PREMISES UNDER THE MATERIAL DAMAGE POLICY INDEMNITY PERIOD CHOSEN WHETHER THE PLANT IS CONTINUOUS OR NOT
- 13. Excess / deductible Compulsory Time Exclusion Clause (w.e.f. 1.4.2011 : may change from time to time) Other than Petrochemical risks : the amount equivalent to the rate of Gross Profit applied to the Standard Turnover for 7 days. Petrochemical risks : the amount equivalent to the rate of Gross Profit applied to the Standard Turnover for 14 days.
- 14. PREMIUM RATING Basis Rate = 125 % loading on average contents rate under Fire policy Profits Rate : Basis Rate is adjusted for • Process involved : loading of 25% of continuous plants (automatic or semi automatic process) : Example Cement factories, distilleries, sugar factories, vegetable ghee factory. • Indemnity Period selected
- 15. RATING SLABS (Based on Process & Indemnity Period) INDEMNITY CONTINUOUS NON-CONTINUOUS PERIOD % % 3 Months 89.06 72.50 6 Months 93.75 75.00 9 Months 112.50 90.00 12 Months 125.00 100.00 15 Months 121.87 97.50 18 Months 118.75 95.00 24 Months 112.50 90.00 30 Months 106.25 85.00 36 Months 100.00 80.00
- 16. SUM INSURED PREFERABLY THE GROSS PROFIT SHOULD BE ARRIVED AT FROM THE LAST YEARS ACCOUNT IN CASE THE LAST YEARS ACCOUNTS HAVE BEEN AFFECTED BY CERTAIN ABNORMAL CIRCUMSTANCES--- ACCOUNTS OF THE PRECEDING YEAR(S) MAY BE CONSIDERED OFTEN THE RESULTS OF 2- 3 YEARS ARE TAKEN IN TO ACCOUNT TO UNDERSTAND THE TREND AND MAKE DUE ADJUSTMENTS FOR THE FUTURE IF THE CHOSEN I.P. IS MORE THAN 12 MONTHS THE GROSS PROFIT NEEDS TO BE INCREASED PROPORTIONATELY
- 17. Definition of Gross Profit Director asked for gross profit of his business and quotes 400,000 Last accounts for ABC Manufacturing Limited:
- 18. Definition of Gross Profit Turnover 1,000,000 Closing Stock 20,000 Total 1,020,000 Opening Stock 20,000 Purchases 350,000 Total 370,000 Gross Profit 650,000 Rate of Gross Profit 65% The amount by which: i) the sum of the amount of the Turnover and the amount of the closing stock shall exceed ii) the sum of the amounts of the opening stock and the amount of the uninsured working expenses (i.e purchases & discounts received)
- 19. What can we learn from this? Uninsured working expenses Only include those costs that truly vary with turnover e.g. 100% reduction in turnover will result in 100% reduction in purchases, but may not lead to 100% reduction in direct labour / wages.
- 20. When definitions don’t match Accounts definition 400,000 @ 40% Rate of Gross Profit Policy definition 650,000 @ 65% Rate of Gross Profit Substantially underinsured as a result Only 61.5% covered Consider carefully what is and isn’t included in uninsured working expenses
- 21. What can we learn from this? Definition of Gross Profit Make sure that insurers and clients are talking the same language.
- 22. Gross Profit v Gross Revenue Gross Revenue policies may be more appropriate for service type businesses Hotels Clubs PR / Ad agencies / TV Channels Private hospital / nursing home Art galleries / Museums Private schools etc.
- 23. STANDING CHARGES Do not vary in direct proportion to any reduction in business. EXAMPLES ARE Salary, Wages, all social security contributions, perquisites, Pension Interest on loans, bank overdraft & Deb. Rent, rates and taxes Depreciation Power / Electricity charges (Minimum charges), Water, Heating, Lighting Research and Development
- 24. STANDING CHARGES Advertisement and Publicity Duties, licenses and patent fees Director’s fees and remuneration Legal, Auditing and other professional fee Insurance premium Conveyance, Stationery, Communication Office and general establishment Repairs and Renewals Misc. exp. not exceeding 5% of total of aforesaid insured standing charges
- 25. Break Even Net Profit Total Cost Standing Charges Variable Cost UNITS Costs Turnover GP COSTS , TURNOVER AND GROSS PROFIT
- 26. SUM INSURED IF OPERATIG IN PROFIT Standing Charges plus Net Profit IF OPERATING IN LOSS Standing Charges Less Net Loss = Sum Insured (if Indemnity period is = or <12 Months) X Indemnity Period / 12 months ((if Indemnity period is >12 Months)
- 27. Example of premium working
- 28. Clauses Material Damage Provision Departmental Clause : cost accounting Return of Premium Clause : 50% Accumulated Stocks Clause : shortage postponed Alternative Basis Clause : in Turnover basis policy Auditor’s fee clause Trend Adjustment : Trend, Variations, Sp. Circumst. New Business Clause Insured’s Property stored at other locations Supplier and customers premises extension Loss due to accidental failure of public electricity/gas/water supply due to M.D.
- 29. Material damage proviso Typical BI policy definition “…provided that at the time of the loss, destruction or damage there shall be in force an insurance covering the interest of the Insured in the property at the Premises against such loss, destruction or damage and that payment shall have been made or liability admitted therefore” except due to Policy excess.
- 30. TYPES OF BI COVERS • ON TURNOVER BASIS • ON OUTPUT BASIS • DIFFERENCE BASIS (Turnover) • REVENUE BASIS
- 31. BASIS OF INSURANCE TURNOVER BASIS: USEFUL FOR ORGANISATIONS IN TRADING ACTIVITY OR INVOLVED IN MANUFACTURING. SUPPLY OF GOODS ON EXISTING BASIS WITH NO ACCUMULATION OF STOCKS REDUCTION IN TURNOVER WILL BE USED TO ARRIVE AT THE INDEMNITY. (Hence in case there is accumulation of stocks the turnover level may still be maintained )
- 32. BASIS OF INSURANCE OUTPUT BASIS: REDUCTION IN THE OUTPUT IS USED TO ARRIVE AT THE INDEMNITY. THUS EVEN IF THERE ARE BUFFER STOCKS THE LOSS CAN BE WORKED OUT AS THERE IS GOING TO BE REDUCTION IN OUTPUT CARE TO BE TAKEN IN CASE OF MULTI PRODUCT UNIT
- 33. BASIS OF INSURANCE DIFFERENCE BASIS: GROSS PROFIT IS ARRIVED AT ON THE DIFFERENCE BASIS. INSTEAD OF STNADING CHARGES, WORKING EXPENSES ARE SPECIFIED. All purchases (less discounts received), % of Annual Wage roll, Power, Consumable Stores, Carriage, Packing Material, Bad Debts, Discounts Allowed, Any other expenses to be specified. (Specification in this Difference basis are used on Turnover basis, and not on output basis )
- 34. BASIS OF INSURANCE REVENUE BASIS / GROSS FEES: POLICY BROADLY FOLLOWS THE PATTERN OF TURNOVER BUT TURNOVER IS REPLACED BY GROSS REVENUE OR GROSS FEES REVENUE BASIS FOR CLUBS, HOTELS, PRIVATE SCHOOLS, PRIVATE HOSPITALS AND NURSING HOMES; GROSS FEES BASIS FOR PROFESSIONALS LIKE SOLICITORS, CHARTERED ACCOUNTANTS. REVENUE : MONEY PAID OR PAYABLE TO THE INSURED FOR SERVICES RENDERED IN THE COURSE OF THE BUSINESS IN THE PREMISES FEES : MONEY PAID OR PAYABLE TO THE INSURED FOR SERVICES RENDERED IN COURSE
- 35. WHAT IS NOT COVERED Under-insurance Difference in value of stocks at the time of fire and on subsequent replacement Depreciation of undamaged stock after fire Bad Debts Loss of goodwill Failure to recover book debts due to destruction of records Litigation costs or third party claims or consequential loss claims generally Loss of Gross profit equivalent to time excess
- 36. TERMS TO UNDERSTAND SPECIFIED AND UNSPECIFIED STANDING CHARGES GROSS PROFIT RATE OF GROSS PROFIT : Financial Year ANNUAL TURNOVER : year before DOA STANDARD TURNOVER INDEMNITY AND INTERRUPTION PERIOD REDUCTION IN TURNOVER TREND ADJUSTMENT INCREASE IN COST OF WORKING
- 37. CLAIM WORKING : STEPS 1. Ascertain Annual G.P. (Specified Standing charge + N.P.) 2. Trend Adjustment to Gross Profit 3. Work out rate of Gross Profit (G.P. / Turnover for F.Y.) 4. Interruption period and actual turnover therein 5. Work out standard turnover (turnover during months / days in preceding year corresponding to interruption period) + Trend Adjustment 6. Ascertain Reduction in Turnover (Standard Turnover less Actual Turnover during interruption period) 7. Apply rate of G.P. to reduction in turnover due to Accident 8. Reduce it by Saving in Standing charges 9. Calculate increase in cost of working : Apply rate of gross profit to ‘reduction in turnover avoided’ and allow lower. 10. Adequacy of Sum Insured : Apply rate of gross profit to
- 38. BI claims methodology Standard turnover less actual turnover = Loss of turnover @ Rate of gross profit (turnover less specified working expenses) = Loss of Gross Profit Less Savings (adjustment for business overheads not incurred) Plus Increased Cost of Working (additional costs incurred to mitigate loss) All subject to adequacy of cover
- 39. ABC Manufacturing Limited Projected Post-incident Claim
- 40. Savings Typical policy definition “…less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Incident.”
- 41. Under insurance • Sum Insured = 715,000 2005 Actual 2006 Projected 2006 Actual Lost Turnover • Limit of cover = 715,000 / 1,430,000 = 50% • Settlement = 476,250
- 42. Any questions?
- 43. THANK YOU