Does the US do it better with regard to BI?

David HendersonFM Global Claims Manager

Northern Europe Operations.

HISTORY

• The BI industries in Europe and in the U.S. developed along independent lines.

– “Sales” form in Europe; (Gross Profit)

– “Production” form in the U.S.

(Gross Earnings)

Similarities and Differences we’re going to look at…

1 Basis of Determining the Financial Loss

5 Make Up

2 Period of Liability 6 Additional costs to replace inventory used to reduce Time Element loss

3 Loss of Market 7 Finished Goods Valuation

4 Actual Loss Sustained

Sales Pound

BI Value

Business Interruption- What does the Policy pay for..

Basis of Determining Financial Loss

• Gross Earnings: Gross Earnings: Interruption of production or business operations which

results in a loss of earnings

• Gross Profit: Gross Profit: Reduction in sales

PR

OD

UC

TIO

NBasis of Determining Financial Loss

– Gross Earnings

SALES VALUE OF LOST PRODUCTION

TIME

REPAIRS COMPLETEEVENT

SA

LES

Basis of Determining Financial Loss – Gross Profit

REDUCTION OF SALES

TIME

SALES RESTOREDEVENT

Gross Earnings – Extended Period of Liability: EPLPR

OD

UC

TIO

N

TIMEEVENT

PERIOD OF LIABILITY EXTENDED PERIOD

OF LIABILITY

Period of Liability

Gross Earnings = Period of Restoration

Gross Profit = Indemnity Period

Period of Liability: Gross Earnings - Period of RestorationPR

OD

UC

TIO

N

TIMEEVENT

PERIOD OF LIABILITY

Period of Liability: Gross Profit – Indemnity Period SA

LES

TIMEEVENT

SPECIFIED PERIOD OF LIABILITY

Period of Liability - Sales Lag

TIMEEVENT

GEPERIOD OF LIABILITY

GEEPL

PR

OD

UC

TIO

N /

SA

LES

Period of Liability - Sales Lag

TIMEEVENT

GEPERIOD OF LIABILITY

GEEPL

PR

OD

UC

TIO

N /

SA

LES

Period of Liability - Sales Lag

TIMEEVENT

GPPERIOD OF INDEMNITY

PR

OD

UC

TIO

N /

SA

LES

Actual Loss Sustained - Indemnity

Basis of the Business Interruption PolicyBasis of the Business Interruption Policy

Gross Earnings: Gross Earnings: link between production link between production and salesand sales

Gross Profit: Gross Profit: reinforcement of reinforcement of indemnity principle of insuranceindemnity principle of insurance

Make - Up – Insurers CreditSA

LES

TIMEEVENT GE POL GP POL GP POL

• Gross Earnings:

– Credit within a reasonable period of time

• Gross Profit:

– Credit within the period of liability

Make - Up – Insurers Credit

• If the sale can still be made6 months after the loss, the period is reasonable

• Even if the time period is less than a day, if the sale is lost the period is

unreasonable

Make - Up Reasonable Period of Time?

Additional Costs to Replace Inventory

Covers additional costs to expedite replacement of all Covers additional costs to expedite replacement of all inventory which was:inventory which was:

Used to reduce the loss otherwise payableUsed to reduce the loss otherwise payable

Expenses considered after expiration of Period of Expenses considered after expiration of Period of LiabilityLiability

Limited to the extent of Gross Earnings or Gross Limited to the extent of Gross Earnings or Gross Profit Profit Loss reduced during the Period of LiabilityLoss reduced during the Period of Liability

Gross Earnings: Selling price

Gross Profit: Replacement cost

Benefits of either approach?

Finished Goods Valuation

Summary

Gross Earnings Gross Profits

Bases of Determining Loss of Revenues

Period of Liability

Loss of Market

Summary

Gross Earnings Gross Profits

Bases of Determining the Financial Loss

Loss of production or operations which results in a loss of sales

Loss of sales

Period of Liability Time to return production to pre-loss levels

Specified period of time

Increase in Loss due to Loss of Market

Excluded but…(EPL?)

Covered to the extent it is a direct result of the loss.

Summary

Gross Earnings Gross Profits

Actual Loss Sustained

Make up

Additional costs to replace inventory used to reduce Time Element loss

Finished Goods Valuation

Summary

Gross Earnings Gross Profits

Actual Loss Sustained

Required Required

Make up Credit in a reasonable period of time

Credit in Period of Liability

Additional costs to replace inventory used to reduce Time Element loss

Covered Covered

Finished Goods Valuation

Selling Price Replacement Cost

Basic Business Interruption Coverage Types

Gross Earnings Gross Profitsreferred to as

“Production” or “Earnings” Based

Forms

referred to as “Sales” Based Forms

Primary Advantage: Unlimited period of indemnity, i.e. TE coverage continues until production restored to pre-loss level

Primary Shortcoming: No standard coverage for continuing loss of sales

Best for: Loss scenarios involving extended production downtime

Most prevalent usage: United States

Primary Advantage: TE coverage lasts until sales restored to pre-loss level

Primary Shortcoming: Fixed maximum time limit on period of indemnity

Best for: Loss scenarios involving limited production loss with protracted loss of sales

Most prevalent usage: Outside the United States

Which form is better?

How to choose?

Typical reasons

• Geographical location

• Tradition

• Comfort zone

Better reasons

• Coverage suited to actual loss circumstances

• Coverage response linked to client’s market conditions

• Coverage suited to individual risk profile

• Coverage that generates best possible payout

What type of Client may be better with which form..

• Aluminium Smelter– Probably……Gross Earnings

• Shampoo manufacturer– Probably….. Gross Profits

• Defence Industry Manufacturer– Probably…..Gross Earnings

• Mining Company– Probably…..Gross Earnings

• Automotive Component Manufacturer– Possibly……Both

• City Centre Department Store– Possibly……Gross Earnings

QUESTIONS?