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Frequently Asked Questions

Average

Would the difficulties in setting growth trend factors be solved by annual Business Interruption declarations which would take into account any unusual one off items and adjust premiums accordingly?

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Many policies have an adjustments clause e.g. ISR Mark IV. However a number of loss adjusters and insurers believe that a Policy can have both an under-insurance clause and an adjustments clause although the two are somewhat incongruous.

You would have to adjust every Policy every year and delete coinsurance but it is a good thought and possible future approach for the industry.

Is it not better to over insure and at renewal have the underwriter make a premium adjustment based on actual Insurable Gross Profit in accordance with the adjustment clause under an ISR?

I have had many clients who have utilised this method. What are your thoughts?

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If the Insured’s cash flow allows it is an option and there is no problem in doing so.

It is a great answer to an ongoing problem.

Doesn’t putting sub limits in reduce the chance of the Average clause being invoked?

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It depends upon what sub-limits you are referring to but the concept of average is generally related to gross profit and payroll where full values (including trend) are required.

Can you explain the impact of the 100% being in the 80% average clause?

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The advantage of having 80% instead of 100% for the purpose of testing the adequacy of cover is that there is a 20% margin or discount on the amount of gross profit at risk to be compared with the Sum Insured/Declared Value in the schedule. It gives the client and broker a margin for error when you are forecasting out 1-2 years (or more) which can be difficult.

How do you calculate Insurable Gross Profit in 24 months in advance without underinsuring the client?

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With some difficulty and due care. You must work through the next 3 years carefully i.e. the insurance year and the 2 year Indemnity Period. An 80% co-insurance clause assists in creating a margin for error.

There are many instances where you can arrange for the co-insurance/ average clause to be removed if you have a formal BI review.

Does a Premium Adjustment Clause allow room to deal with changes in forecast Insurable Gross Profit?

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It does not remove coinsurance but if you over insure then adjust the Policy everyone wins.

I am a Steadfast Broker and have been told if you use the Steadfast Calculator the Average clause is removed. Is that correct?

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On Business Pack Steadfast Policy Wordings this is correct but you must use the BAS statement input option. A Business Interruption Calculator is not an insurance policy against under insurance. We recommend where in doubt consult with an expert such as MSM Loss Management.

What’s the danger of using turnover less 10% to come up with a sum insured figure as I have known other people to do? Are we better to use the gross profit different method?

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Turnover less purchases is a sensible approach as an alternative. Deducting 10% from the turnover number is speculative. Then you need to add for trend through the insurance year plus the Indemnity Period. Your methodology could lead to significant under-insurance.

I need a simple way to calculate Insurable Gross Profit for my smaller clients – any tips – do you have a one pager?

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The simplest method is to arrange a business interruption cover based on Annual Revenue – alternatively turnover less purchases is a good approach but you must allow for trend during the insurance year and Indemnity Period.

Does average clause apply to both total and partial loss?

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Under a Material Damage policy normally no – it applies to partial losses but the total loss means they are impacted by only getting the Sum Insured or Policy Limit. On a Business Interruption claim it depends upon the circumstances but average applies if underinsurance exists on Insurable Gross Profit.

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