If possible we use budgets or projections that may be available if these provide us with a view on where the business is going. As the question suggests this is not always possible. This is a difficult exercise and requires judgement. Generally the owner will have a view on where the business is tracking into the future and have a view of future trading.
If in doubt we encourage a review regularly i.e. mid-year to ensure that the Sum Insured is consistent with how the business is trading.
That is a simplistic view. You need to trend for the policy year, and then both years. Each of the 3 years could be different
The drivers for Business Interruption cover are both revenue and gross profit. If gross profit remains the same though revenue is increasing then the rate of Insurable Gross Profit has decreased due to increased costs or reduced selling price. That is why you need to review your client’s business operations during each and every annual review. The cover should be based on Insurable Gross Profit.
The determination of trend depends on a number of factors. However, the easiest way is to look at the historical sales during the previous three or four years of business operations and work out the growth and decline in business during that period. You then need to make adjustment to this rate by identifying any special circumstances that might affect the business in the next 12 to 36 months. Special circumstances include general economic outlook and individual business decisions including expansion, product innovation, etc. A (realistic) budget may assist.
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.
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