Under-insurance a Global Problem in Business Interruption Policies

Survey of under insurance in business interruption insurance in the UK is currently being undertaken.

The Chartered Institute of Loss Adjusters (UK) is undertaking a survey into the level of under-insurance on business interruption policies in the UK.  The survey is conducted for all their members, of which I am a Fellow, but also involves brokers and insurers.

The last survey in the middle of 2009 suggested that some 52% of business interruption policies have declared amounts that are too low. While a disappointing result, my own research conducted over the past 12 years suggests that the UK has much higher rate of full insurance in Australia.

My research is in line with work undertaken in Australia by CGU Insurance, under their right cover program, which suggests only 2% of Australian SME business are fully protected with business interruption insurance.

Compare this result to the findings of yet another survey, this time conducted by Vero Insurance and reported last week in Insurance News (5th December), which suggests that around 84% of SME owners believe they are fully insured. This is similar results to a survey conducted by Zurich with Cameron Research a year or two back and reported in Zurich’s Z2B Magazine.

There is clearly a disconnect between what people believe they have, to what they really need, when it comes to a claim. This is across most classes of insurance but arguably none more so than business interruption insurance.

I would remind brokers and underwriters that they can do a quick reasonableness test on the adequacy of their client’s business interruption sum insured by using the Indicative Rate of Gross Profit for the particularly industry of the client in the Risk Assessment area of LMI RiskCoach. The safest way, of course, is to either use www.bicalculator.com or have Risk Management International conduct a Platinum Sum Insured Review.

The end result of the Platinum Review is a written report outlining the coverage recommended and why, as well as an Excel Spreadsheet of the calculation, which can be used by the business for which it was designed for the next two renewals. With businesses changing so much over time, my stong recommendation is that a full review is undertaken every 3 years or when there is any change to the business.

Many insurers now recommend to their brokers and clients to have the Plantinum Review completed by LMI and if the recommendations are taken up, the insurer waives co-insurance. The logic being that if they client does all they can to get it right the insurer will not penalise them should they grow faster than predicted.  To learn more visit http://www.lmigroup.com/Content.aspx?catId=126.

Once the Chartered Institute of Loss Adjusters release their findings from their latest research, I will let readers know.

3 responses to “Under-insurance a Global Problem in Business Interruption Policies”

  1. Annika Thorsell says:

    Hi,

    I am involved in stress testing using realistic disaster scenarios. I am interested in your current view of underinsurance in Business Interruption in Australia. The scenario that I am using is a large earthquake in Sydney and I need to make an assumption on percentage of commercial businesses not having enough BI insurance to pay for their economic loss and therefore defaulting on their loans. I would be interested in any comments you might have in this regard.

    Kind Regards,
    Annika

  2. Allan says:

    Hi Annika

    I do not have any statistical proof for my answer but my gut tells me that under insurance comes up in more than half the claims our offices are involved in. This is where under insurance involves too short an indemnity period, a sub-limit not being high enough or the sum insured /declared value being under stated, often due to it not being reviewed for several years.

  3. Annika Thorsell says:

    Thank you so much. Your answer assists with our high level assumptions for the stress testing.

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