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Business interruption… Groundhog Day?

COVID-19 has raised some tricky questions about business interruption cover around the world and cyber-related issues continue to present complicated challenges. We can afford to focus on those concerns because we already have the basic BI cover sorted out. Or do we?

In 2017, RIMS issued a report that summarised the findings of a business interruption survey. The report offered a snapshot of the scope of BI cover and the level of confidence that risk managers had in their insurance programmes. Unfortunately, the results suggested that the scope of cover for many businesses was inadequate and the overall level of confidence in programmes was low.

Here are some key observations from the survey report:

  • Annual review of values was only undertaken by 68% of respondents and never by 10%.
  • Time element worksheets were completed by 41% of participants, but were found to be confusing and difficult to complete.
  • Many respondents advised that they take no BI cover, or else extra expense only.
  • 35% of respondents had 12-month maximum indemnity periods, with only 14% in excess of two years.
  • 47% of policies were on a gross earnings basis with 32% on gross profit, leaving 21% of respondents who weren’t sure what the basis of their cover was.
  • When making claims, 58% of respondents reported difficulty in quantifying loss, with 44% being asked for information that did not exist.

These findings mirrored a similar picture in the UK. In 2017, the Chartered Institute of Loss Adjusters (CILA) issued the findings of a survey investigating the adequacy of business interruption sums insured. That had been preceded by three previous surveys that found on average 43% of BI sums insured were low. Of those that were low, the shortfall was 53% of what the sum should have been.

The 2017 survey gave very similar results – 44% of BI sums insured were low, with an average shortfall of 44%. The results aren’t favourable, albeit policyholders in the UK benefit from the fact that BI policies can be — and about half are — written on a declaration linked basis, which means they are not subject to any under-insurance provision. With UK BI premiums in the region of £700m ($959m), the punchline of the survey findings is that there is a premium shortfall in the region of £80m ($110m). Not enough to sink the industry, but enough to make you cross if somebody stole it from you.

So, what is causing this shortfall? The 2017 UK survey identified various issues, notably:

  • Policyholders not understanding that policies borrow the term ‘gross profit’, undefined in general business parlance, and give it a specific definition likely to be higher than the meaning of exactly the same term in a set of accounts
  • Policyholders misunderstanding the basis period on which a sum insured should be set
  • Policyholders having unrealistic expectations of cost reductions following insured incidents
  • Policyholders forgetting to multiply annual amounts proportionately for longer maximum indemnity periods

Do the problems all stem from failures on the part of policyholders? No. Insufficient explanation of how coverage works was up near the top of the list, and it doesn’t help if insurers use language already in everyday business use, give it a specific definition, then throw their hands up in horror when policyholders get the answer wrong. It is Groundhog Day – the same problems representing themselves on a rolling basis.

There have been efforts to remedy the challenges. In 2012, the Insurance Institute of London (IIL) and the CILA issued a report suggesting tweaks to policy wordings to avoid common problems recurring. That process involved just under 40 professionals from a variety of backgrounds. Brokers, underwriters, loss adjusters, loss assessors, solicitors etc. had a brain dump of BI claims problems. Two tests were then applied to that: is it a common problem, and can it be sorted by a tweak to policy wordings? If the answer is ‘yes’ to both of those, it went into the report. So the topics were not what we decided to write about from the outset, but were the result of distillation of everyday experience from practitioners.

That was refreshed in 2019, with the added sponsorship of the Chartered Insurance Institute’s Society of Claims Professionals, albeit the words remained mainly the same. It can be purchased from the IIL or a digital copy downloaded from the CIL site. The two editions combined have had about 280,000 hits. This number is strong, but the objective was to bring about significant policy wording change. There has been sporadic adoption of some of the recommendations over the years, but we still seem to be re-inventing the wheel to an avoidable degree.

The FCA COVID-19 test case in the UK will refocus everybody on clarity in policy wordings so that will be a new chance to incorporate change for the benefit of all parties. In the UK, had it not been for the COVID-19 pandemic, CILA would likely have carried out another survey to depth test the degree to which BI under-insurance continues to be a problem. That will take place in the near future – but, spoiler alert, I would be very surprised if that suggests any improvement to date. This is a current and ongoing rather than historical problem. Onwards and upwards.

To learn more about common business interruption covers, click here.

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