Only about a quarter of Business Packs still have a Premium Adjustments Clause for Business Interruption

Traditionally, Business Interruption policies were sold on a declaration basis where the Sum Insured –or the Industrial Special Risks Policy, and others– modeled on this form, the Declared Value and the premium was based on this initial figure.

The test for under insurance (Coinsurance or Average), was set at 100% and so it was, and is still, necessary for an Insured to set the Sum Insured / Declared Value sufficient to cover a loss that could occur on the last day of the Policy Period, and then run for the entire Indemnity Period.

To avoid any penalty for being under insured, the prudent approach was to over insure and then, at the end of the period of insurance, make a second declaration for the actual insurable Gross Profit, based on the amount actually achieved. If the original Declaration was above the actual, then a refund could be sought based on 100% of the premium rate for the amount that was over declared, and this could be used as a deposit premium for the following period.

With the move from stand-alone business interruption policies to Business Pack policies (although some good ones still exist), four things happened over the past 35-40 years since they came into their own.

The first, is that the premium rate charged by the industry for business interruption has reduced significantly. In some cases, by nearly 50%.

Secondly, the test for co-insurance went from 100% average to 80% Coinsurance.

Third, due to the cost of administration, the difficulty in getting the figures from SME clients, and some other factors, fewer and fewer declarations were made.

As a result of the combination of the above, insurers started to remove the Premium Adjustments Clause from their Business Packs.

An analysis that I commissioned the PolicyComparison.com[1] researchers do for me, showed that only 25% of Business Pack Policies still have the clause.

So why is all this interest? The answer is that with COVID-19, a great many businesses are looking to cut costs due to their revenue and insurable gross profit being adversely affected.

It is foolhardy in the extreme to cut into your insurance program as you lose the financial protection, at a time the business is vulnerable and an uninsured loss could be the straw that breaks the camel’s back, sending the business and the owner’s/s’ life time into bankruptcy.

With a policy that has a Premium Adjustments Clause, you do not risk the future by reducing a Sum Insured / Declared Value that you may well need into the future, but adjust the premium so that the insurer receives the true premium for the risk that was ultimately transferred to them due to the down turn in the economy brought about by COVID-19.

Those that have a policy that contains the clause, are obviously far better off than those without.

It does show that the original developers of the wording really thought through the issues and developed a product that served both the insurers’ needs to protect in case of selection against the insurer[2] and also the customer and how they may need some relief in tougher economic times.

1. Thanks Sharron and Deb for arranging this.
2. One example of what is known as selection against the insurer, is attempting to take out insurance coverage when you do not have it in the face of a known threat, such as a cyclone. Another common one, is where an Insured tries to estimate the maximum probable loss and only insure for that and therefore save premium. Coinsurance tests were designed to stop the second example, while embargoes were created to stop the first.