M93 - Chapter 8

Question 1

What is a business at risk from after a claim occurs that stops or inhibits trading?

Answer 1

Losing customers / orders

Lost income / profit

Ongoing costs that could increase (Rent, rates, insurance)

Salary bill

Question 2

How does a BI policy assist a business in need?

Answer 2

Pays ongoing costs

Makes up profit shortfall

Pays extra costs - Overtime, provisional repairs, subcontractors, temporary premises or machinery

LESS ANY SAVINGS MADE A REDUCTION IN TRADING.

Question 3

To avoid confusion in BI claims, Insurers often do not use the phrase ‘Gross profit’ what do they use?

Answer 3

Insured profit

Question 4

What item on the accounts sheet does the book say cannot be insured under BI?

Answer 4

Bad debts

Question 5

What does turnover consist of?

Answer 5

Variable charges - Variable sales etc.

Standing charges - Fixed payments

Net Profit

Question 6

Definition of Insured Profit

Equation

TCW
OWU

Answer 6

value of opening stock + work in progress + uninsured working expenses

Question 7

How will the values of opening and closing stock to ascertained? (deducted from settlement)

Answer 7

Calculated via your normal methods

Make a provision for depreciation

Question 8

Key difference between Insured and gross profit

Answer 8

Insurers are concerned with

1. Profit that relates to the insured business
2. That can be subject to indemnity

Question 9

For Declaration-linked basis of cover - What terms are applied to insured to declare?

Answer 9

1. Supply estimate of profit for the year to come, where the indemnity period exceeds 12 months.
2. After 6 months supply an accurate declaration
3. If higher, pay additional premium with no limit
4. if lower, receive an RP but no more than 50%

Question 10

What is the common liability limit % for BI claims

Answer 10

133.3%

Question 11

How are ‘extension limits’ controlled within a policy?

Answer 11

By %, inclusive of the 33.3% uplift.

EG
SI: £400,000 + 33.3% Uplift: £533,200

Extension limit 10%

£53,200

Question 12

For ICW claims cover is restricted to the ‘economic limit’ what is this?

Answer 12

The insurer will pay for more than £1 for every £1 to prevent the loss of profit.

Question 13

In short, who is increased cost of working best suited for?

Answer 13

Those who don’t rely on their premises to trade EG Financial advisors, legal people, brokers.

However, they may still be some loss of profit from lost appointments, leads and documentation.

Question 14

How is adequacy of ICW cover assessed?

Answer 14

Costs could be ‘reasonably & necessarily incurred’

1. What expenses will I incur to get back trading quickly?
2. How much will this be?
3. When will these costs happen?

Question 15

On what basis does ICW claims work?

Answer 15

First loss

Question 16

What are ‘revenue’ type BI covers?

Answer 16

Gross Revenue (Solicitors and other professionals)

Gross Fess (Private schools and similar)

Gross Rentals (Property owners)

Question 17

What does rent receivable cover?

Answer 17

Loss rental income whilst property is uninhabitable and until a tenant can move back in.

Question 18

What does Advanced profits insurance cover?

Answer 18

The profits/future earnings of a new business to be set up, is to be financed by firm and its bankers and has business plan, purchased/tendered equipment and employed staff.

Question 19

How is advanced profits cover limits made up?

Equation

Answer 19

Loss of insured profit + Increased cost of working - Saving on business costs

Subjected to average, consequences of damage caused by an insured contingency, and occurring within the policy period.

Question 20

2 x other BI covers

Answer 20

Book Debts
Research Expenditure (delays in R&D)

Question 21

2 x Indemnity periods

Answer 21

Indemnity period - The amount of time the event effects the insured.

Maximum Indemnity period - Maximum period that the insurance will pay out for (as losses may exceed the period that the claim is fixed in)

Question 22

To forecast maximum indemnity period, the factors to be considered are?

Answer 22

Time to

1. Rebuild
2. Reequip
3. Stock up
4. Time to resume production

+ Time to regain market share (reduced by outworkers, buffer stocks and overtime)

Question 23

For a seasonal business what factors must be considered for a BI limit?

Answer 23

Rebuilding of premises + re-quipping
Repair of facilities
Period to regain market share/guests

Question 24

What is a special feature of Advanced profits cover concerning the indemnity period?

Answer 24

The period starts from when the business would have commenced trading

Question 25

What is the typical maximum cover under capital additions

Answer 25

£500,000

Question 26

When does average apply to a declaration linked BI Insurance

Answer 26

If profit is 50% under estimate

Question 27

How is the economic limit calculated?

Answer 27

Gross profit / Reduction in turnover avoided

Question 28

What factor influences the basis rate for BI

Answer 28

Material damage inception hazard

Question 29

How can a BCP assist an insurer

Answer 29

When assessing EML

Question 30

What restrictions do Insurers place on ICW payments?

Answer 30

Max 50% in the first 3 months of the loss

One ninth of the difference between SI and amount in the next 3 quarters of the 12 months.

Other options include pro-rata, or no restrictions.