The importance of having the correct BI covers in place

The need for a business to be adequately prepared for major business interruption events has never been more crucial as we mark two years since the July 2021 riots, a year since the catastrophic KZN floods of April 2022 and the Covid-19 pandemic national state of disaster coming to an end during the same month. There is no denying that business operates in a volatile environment where the lessons we learnt from these events are a testament to the resilience of the businesses that are here to tell the tale.

At claims stage, your insurer is likely to send a loss adjuster who is responsible for investigating and assessing insurance claims on behalf of the insurer. Their main role is to evaluate the extent of the loss or damage suffered by the policyholder and to determine the appropriate amount of compensation that should be paid out by the insurer.

“Loss adjusters are appointed by insurance companies to carry out investigations into claims made under insurance policies,” explains Yolenda Makhathini, a Financial Risk Consultant at Aon South Africa. “The process involves a site visit, gathering information and interviewing witnesses to establish the facts surrounding the claim. They will then use this information to determine the cause and extent of the loss or damage, as well as any liability that may be attributed to the policyholder or third parties. Based on this assessment, the loss adjuster will then make recommendations to the insurance company regarding the appropriate compensation to be paid out to the policyholder.”

“It is also at this stage of the process that many organisations may discover gaps in insurance cover or aspects of the business operations that enjoyed limited or no cover at all, which could be financially crippling to any organisation,” Makhathini adds.

The real value of having a professional broker and risk advisor on your side often comes to light at this juncture. “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,” explains Makhathini.

Calculating Business interruption (BI) insurance covers

“Calculating the right amount of insurance cover for your business is not a simple process, requiring a thorough understanding of your risks, assets, liabilities and financial needs. And the bigger and more diverse the business is, the greater the complexity of the exercise becomes.  Working with a professional insurance broker and risk advisor can help you make informed decisions when it comes to the right coverage for your business,” says Makhathini.

“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,” she adds.

Speak to your broker about conducting a business interruption review that addresses the following when estimating the right amount of insurance coverage for your business:

• Assess your business risks: Start by identifying the business interruption risks that your business is faced with, such as catastrophe events, property damage, liability claims, cyber-attacks and supply chain interruption. Consider the likelihood and severity of each risk and how it could impact your business financially. The overall claims history of the business should also be reviewed to identify risks.
  
  
• Review your Financial information: The process takes into account 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 on the basis of a reliable methodology to calculate BI that can be applied annually.
  
  
• Consider your revenue and expenses: Evaluation of your business revenue and expenses, including salaries, rent, utilities and other operational costs. This will help you determine how much coverage you need to protect your cash flow and profitability in case of a business interruption.
  
  
• Changes in operations: If you have changed the nature of your business operations, such as adding new products or services, or expanding into new markets, you may need to adjust your insurance coverage to ensure that you are adequately protected.
  
  
• Business growth: If your business has grown significantly in terms of revenue, employees or assets, you may need to increase your insurance coverage to reflect your increased risk exposure.
  
  
• New regulations: If there have been changes in regulations that affect your industry, you may need to update your insurance coverage to comply with new requirements.
  
  
• Supply chain: Changes in your supply chain or any supply chain pressures have a fundamental effect on your business. Your insurance coverage needs to reflect these changes from a risk perspective.
  
  
• Adequacy of the sum insured – Make sure that you are not over-insured i.e., paying more than you need to, or underinsured, which could leave you out of pocket during the claims process.
  
  
• Interruption Period – Make sure you haveenough cover for the entire period that the business may be interrupted for during a worst-case scenario.

Calculating the correct sums insured on your business interruption 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.

How Often to review your business insurance covers

Business interruption policies are generally renewed on an annual basis. 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.

“This trend translates into policy renewals requiring more time to evaluate and finalise, especially in circumstances where alternative coverage solutions need to be found in the market or risk management measures need to 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,” Makhathini urges.

“Having a thorough understanding of how a possible business interruption scenario will play out in your organisation, starts with having a professional broker and risk advisor on your side that can provide your organisation with advice and solutions that give you the clarity and confidence to make better decisions to protect and grow your business, ensuring that when business operations are interrupted, there are no unexpected gaps or surprises waiting for you,” Makhathini concludes. 

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