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.
I have had many clients who have utilised this method. What are your thoughts?
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.
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.
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.
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.
It does not remove coinsurance but if you over insure then adjust the Policy everyone wins.
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.
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.
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.
Under a Material Damage policy normally no average 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.
MSM comprises a multi-disciplined professional team including qualified accountants with over 25 years experience.
Our team has expertise across a diverse range of industries and organisations.