Blog question on insuring stock and business interruption when prices are highly volatile
I have a client insured under an ISR which manufactures and sells stock which can vary wildly with pricing depending on supply and demand. It is very much weather related.
How is it best to insure this, should I consider a stock throughput policy?
Will [surname and email provided]
The Industrial Special Risks (“ISR”) policy is the perfect vehicle for this sort of situation if used in the way it was originally designed. The client needs to value the stock at the cost of production, ie, direct labour, direct material costs and direct factory overheads at the start date of the policy. At the end of the period, they make a second declaration and if the cost and or volume of stock has changed then you make a second declaration based on 50% of the ISR rate so that the Insured pays and the Insurer receives a premium based on the average value during the period of insurance. To be technically correct, the Insured does the declaration if the value of the stock goes up or down and the Insured pays an extra premium if the price has gone up and receives an refund if the value has gone down.
The trick is to ensure that the Limit of Liability is high enough should the loss occur at a peak price period for the stock.
With business interruption it is similar but different. The client should make a declaration based on the best possible selling price at the start of the insurance year and pay the deposit premium on that figure. At the end of the insurance year, they declare the insurable gross profit they did earn and typically this is lower and they receive a premium refund based on 100% of the ISR rate.
The mechanics of the premium adjustments clause are found in the ISR policy under the section titled Memoranda Applicable to all Sections. From memory it is the 5th memorandum.
I am not a big fan of insuring the business interruption cover under a stock throughput or manufacturers output policy. I addressed this in detail in a series of 5 posts earlier this year starting with the one you can find here. To read the rest use the search function in this blog and type in MOP.
I cover all of this off in detail in my book on the ISR which I am sure you have in your office. Again going on my memory it is section 13.5 in Volume 1, the Mark IV.
For any readers who do not know of this book or the others that I or Steve and I have written please visit the publications area of the LMI Group website as several of them (not the ISR) are free.