Don't confuse business income values with business interruption exposure

Many businesses confuse business income values with business interruption exposure. But the two are very different and can be far apart. Understanding that and reporting correct BI values has huge implications for limits, deductibles and risk improvement. The experience of one FM Affiliated client, a rapidly growing distribution business, illustrates this point.

When asked to provide business income values, our client reported a BI of several hundred million dollars. Although this value could have been taken as is, the FM Affiliated account team began investigating its accuracy. The fact that the client was not using BI worksheets was a clue that they needed help calculating values. It did not take long for the account team to figure out that the client was reporting exposure values for their BI values, rather than a full annual BI value.

Why accurate values are important

Although the client was frustrated at first by the process, over time, the account team helped them understand how policy limits, loss expectancies, and risk improvement prioritisation hinge on correct values. The account team explained the importance of accurate BI values, with these facts:

• BI value is an estimate of an entity's annual financial earnings generated from normal operations, which would be lost if the business ceased operations indefinitely. It is a reference amount that is not based on any specific loss scenario.
• The business interruption exposure is an amount that reflects the financial loss an organisation could incur in a specific loss event. This exposure considers interdependency impacts on other locations, recovery time, makeup capabilities and other factors.
• Reported values are the basis of an insurance contract, it is therefore important that property and business interruption are protected at 100 percent of their value.

The account team had a big task ahead to obtain accurate BI values from this client. They started by digging deep to understand the client's business. They also requested the help of the FM Group's Business Risk Consulting (BRC) services. The account team set up a meeting with the risk consultant and the client's broker. Our business risk expert was able to help explain that exposure BI reporting was skewing the engineering and underwriting of the account.

Value template and BI worksheets

Next, several meetings were held with the broker and client to get everyone on the same page. And, the client agreed to release key financial data. Through this collaboration, FM Affiliated was able to put together a customized BI value template for the client and help them create precise BI worksheets for all their locations. Next, FM Affiliated met with the client's risk manager and CFO to explain the process and get them to agree to use of annual values. To everyone's surprise, the resulting BI amount was over seven times that of the originally reported BI!

Correcting this value means that this distribution business is better protected and better positioned for success; the client was able to maintain their large blanket limit and get appropriate percent deductibles. If they suffer a loss, they can feel confident that, with correct BI values, their claims process will go smoothly. Correct values will also help the client to better prioritise risk recommendations. With an expanding customer base, this client could not afford the luxury of being non-resilient.

FM Affiliated offers a myriad of resources, such as BI worksheets and valuation tools, to help with values reporting. Please contact your account team for more information.