Advising on robust business interruption cover

Business interruption (BI) can be financially devastating for a company, reducing, or even halting business operations due to unforeseen events. According to the Allianz Risk Barometer, BI remains one of the top three threats to South African businesses in 2024, following critical infrastructure and cyber incidents. BI is also a direct consequence of extreme weather events driven by climate change.

As a result, BI should be a major concern for all businesses, regardless of size or industry. And we see many companies proactively trying to de-risk their supply chains by developing alternative suppliers, improving business continuity management, identifying bottlenecks, and reassessing their business interruption insurance cover.

The importance of accurate forecasting

Despite its significance, many businesses are inadequately covered for BI. Business owners frequently misjudge the recovery time required post-event or underestimate the adequate amount of cover needed. For example, disruptions from fire often require longer recovery times than certain other perils.

How financial advisers can assist

Calculating the right amount of insurance is not a straightforward process. A detailed BI review is essential for setting accurate policy limits that reflect true exposure and specific business risks.

This points to financial advisers having to develop a comprehensive understanding of a client’s operations, revenue streams, and potential risks to ensure adequate coverage. This includes considering expenses such as salaries, rent, and utilities. Advisers should also evaluate financial data to account for potential revenue volatility during changing macroeconomic conditions. They should accurately value business assets and income streams, consider supply chain impacts on cover needs, and identify events that could disrupt operations and lead to income loss.

Scenario planning is crucial to determine alongside the business owner, the necessary recovery time. Typically, there is a 48- to 72-hour waiting period before cover takes effect after a loss. The “restoration period,”  that can last up to 36 months , covers the time needed to repair or replace damaged property and resume operations.

Insurers cover business income loss only during the restoration period, meaning the time needed to rebuild, repair, or replace damaged property. This period starts when the damage happens and ends when the property is ready for normal operations to resume. Even if the policy expires, cover continues if the damage occurred while the policy was active. The BI endorsement covers the entire restoration period.

Periodic reviews of BI cover should ensure the sum insured remains adequate as the business evolves. Advisers should recommend the necessary policy adjustments accordingly.

An education effort

A significant cause of unsatisfactory claims experiences is the lack of understanding of coverage terms and exclusions. Many business owners are unaware of the details in their BI clauses, leading to mismatched expectations. Financial advisers should thoroughly review policy documents with clients and clarify any uncertainties.

Advisers should also assist clients in meeting policy deadlines, promptly notifying insurers of claims, and providing required documentation.

Taking a broader view

Beyond insurance, financial advisers should provide strategic advice on broader risk management and business continuity planning. BI cover should be integrated into a holistic approach to protect the business, recognising that insurance alone cannot cover market share or reputational losses. A robust disaster recovery plan is essential to enhance business resilience.

According to Allianz, global business insolvencies are projected to rise for the third consecutive year in 2024 by 8%. This points to the vulnerability of sectors like hospitality, transportation, and wholesale retail.  By ensuring business owners understand critical terms and specific relevant policy language, and by looking outside of the boundaries of insurance financial advisers can assist these businesses in particular to prepare better for possible BI.

*This article was sponsored by Auto & General Insurance Company Limited, a licensed non-life insurer and financial services provider.