Blog question: Why do we Make Business Interruption so Difficult?
I am sorry to email you direct with a question however I am no longer on LinkedIn.
If it is not something that you could assist me I will understand.
I am having trouble putting in words why something is done a particular way…in the basis of settlement why is it that we “apply the rate of gross profit to the reduction in turnover” and just don’t do a straight calculation and pay” the gross profit that the business would have received then deduct savings and add on for additional expenses “
My thinking is that if we don’t use the widely used and accepted practice then we will end up with a flawed outcome for the client – because if the business is still receiving some income then it has some ability albeit (reduced ability) to pay some expenses .
I hope this makes some sense and would really appreciate the value of your input to get my head around why I know it needs to be done by applying the rate of GP to the reduction in turnover.
Thank you for time it is appreciated.
Steve [surname and email provided]
I responded as follows:
The issue is that insuring accounting gross profit alone could and often would leave the client with an uninsured portion of the loss. For example in some industries, wages are included in the calculation for accounting gross profit and if we insured the accounting gross profit they would not have cover for this major expense of an important part of their business. There is a bit under LMI BIcalculator.com which explains this in more detail. http://www.bicalculator.com//KC/kc1.aspx?id=37
What some insurers are moving to is to insure Gross Revenue and then do what you say and deduct savings. To arrive at the premium to charge they are using the LMI Indicative Rate of Gross Profit from LMI RiskCoach which shows the percentage of turnover (Gross Revenue ) that is typically not required to be insured.
The simplest way is to insure your clients turnover less purchases and then make a fair and reasonable allowance for growth over the next few years. Remember if you use LMI BICalculator.com many insurers will wave co-insurance and it being a smart form the whole calculation process is mapped out and explained for you and your client.
Hope this helps.