Renewing your business insurance policy during turbulent times

December 5, 2022

Share on LinkedIn Share on Facebook Share on X

By Bart Oversier – major and complex loss adjuster

Amid economically challenging times, measures to combat the spread of COVID-19 negatively impacted sales for entrepreneurs worldwide. During lockdown periods, the Netherlands government organized assistance to mitigate the risk of companies falling over en masse — the most important initiative being the NOW schemes.

Large-scale impact on supply chains and rebuild times

The last lockdown in the Netherlands came to an end by February 2022. A short time later, the Russian military invaded Ukraine. After the invasion, in addition to the shortages of goods created by the lockdowns, the European economy faced even longer delivery times. In addition, inflation rates skyrocketed as the global energy and commodity prices rose sharply.

Supply chain tightness — also known as the shortages of goods and services — isn’t the only concern. The Netherlands is facing a labor shortage that’s left many sectors understaffed. The tightness in both the supply chain and labor market leads to long delivery times for goods and services. For those who experience property damage, this increases the period required to replace goods and inventory lost. Time frames required for recovery are also increasing.

Regarding the schemes in the Netherlands, two developments have been added to address the rebuilding of structures:

Development 1

Anyone who is going to build new or needs major structural damage repaired is required to apply for an environmental permit (formerly a building permit). The timing of the application determines the requirements that must be met. An application submitted today, for instance, must comply with the regulations in the building code as in effect today. As of February 1, 2022, the principal of construction is required to provide the building with a large amount of renewable energy in the event of a major renovation (read: repairing a major building damage). In practice, this effectively forces installation of solar panels, a heat boiler and/or a heat pump. However, heat pumps in particular are hardly available due to the scarcity in the supply chain on the one hand, and ordering them en masse due to the sharp increase in gas prices on the other. As a result, the construction deadline continues to increase.

Development 2

On November 2, 2022, the Administrative Law Division of the Council of State ruled that the construction exemption of nitrogen does not comply with European nature protection law. As a result, the division concluded that this construction exemption may not be used in construction projects. Although this removes the building exemption, it does not mean that there is now a total ban on construction. As in the situation before the construction exemption was introduced, the possible consequences of nitrogen emissions must now be investigated per project. It can be expected that this ruling will have delayed effects on the granting of permits.

These complex developments will result — much more often than was previously the case — in the usual insured period of 52 weeks not being sufficient to fully complete the recovery. To ensure business operations get back on track, consider opting for an insured period of at least 78 to 104 weeks. Of course, a company-specific risk inventory is necessary before making a decision.

Revenue considerations post-COVID

Many business owners, including the hospitality industry, lost sales in 2020 and 2021 due to the lockdowns. Other sectors benefited, well-known examples being supermarkets and home furnishers. Whether businesses suffered or benefited from the lockdowns, we can assume that many of them experienced unusual levels of turnover. This affects the determination of insurable interest for business losses.

The last year for which a company’s figures are “final” often serves as a reference for the statement of insurable interest. If that defining year is 2020 or 2021 then it is important to be aware of that year’s figures as to the impact of COVID-19 on annual sales. An increase or decrease in sales of more than 30% could be just around the corner. An increase of more than 30% threatens underinsurance, a decrease of more than 30% threatens over insurance. A part of the overpaid premium cannot be recovered because it falls outside the bandwidth of the usual increase/decrease clause.

Inflation concerns

Inflation had already been attracted by the generous money market policies of national banks to stimulate the economy during the pandemic, but it rapidly increased due to the war in Ukraine and the resulting scarcity of raw materials, energy and goods. The harmonized inflation rate (HICP index) in Europe in September this year was nearly 10% from a year earlier. This figure is even higher for the Netherlands at 17%. This is the highest figure ever measured, and an unprecedented turnaround compared to the many years before when there was hardly any inflation.

As far as business interruption policies are concerned, the high rate of inflation requires careful determination of the sum insured. Assuming unchanged sales (in volume), a company’s turnover may rise sharply because sales prices are higher. Whether this also increases the insurable interest varies from company-to-company. It depends on the extent to which variable costs increase. Are they rising faster or slower than sales prices? The influence of inflation on the interest (roughly the difference between sales and variable costs) therefore requires a more specific analysis at company level to avoid under- or over insurance outside the limits of the increase/decrease clause.

Inflation can also affect the business loss calculation after an insured event has occurred. For example:

  1. Future revenue loss is commonly calculated using the revenue trend up to claim date; however, under current conditions, it is more questionable than ever how strong this trend will continue in the future if it is driven primarily by inflation.
  2. The past interest rate is less suitable as an indicator of the interest rate during the claim period than it has been in the past. As mentioned above, it depends very much on the extent to which the entrepreneur experiences inflation on the purchasing side and the extent to which he can pass it on. The gross margin and therefore the interest percentage can change significantly as a result.
  3. When assessing whether production losses can be made up within the insured period, greater consideration must now be given to the extent to which this can then also be done at the same margin. If rising purchase prices cannot, or cannot sufficiently, be passed on in sales prices, then the margin during catch-up production is lower than it would have been if production had not stopped. Then, despite catching up with the loss of production, an operating loss component remains.

Looking ahead

Current developments play a role in the prolongation of business interruption policies. More than ever, specific attention is required to the insured period and the determination of the sum insured. The most common insured period of 52 weeks seems in need of a robust revision. With the determination of the insurable interest surrounded by more uncertainties than was previously the case, consideration could be given to increasing the usual 30% percentage in the increase/decrease clause.

Tags: building, inflation, Insurance, Labor shortage, nterruption, Policies, Policy, Property, Property claims, Property damage, supply, Supply chain, View on property