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How to Calculate Business Interruption Insurance Value

Determining Business Interruption values involves a process so complex that help of professionals beyond your insurance brokers may need to be involved. Unlike physical assets, which have concrete values, the factors involved in calculating your company’s risk exposure when your business is interrupted change and fluctuate over time.

Aside from the obvious reason that it helps determine the appropriate amount and type of cover, getting a Business Interruption valuation is crucial in making sure that your company is not overinsured or underinsured. It also helps in identifying the risks your daily business operations are exposed to and is essential in choosing the right risk transfer limits for each exposure.

Business Interruption Worksheet Basics

Corporations update business interruption values each year. To do this, you could use a Business Interruption (BI) worksheets which ask for the following data:
  • Total sales (or sales value of production)
  • Less: cost of goods sold
  • Less: utilities
  • Less: externally sourced services
  • Less: other costs that would discontinue

While Business Interruption worksheets are important as a Business Interruption valuation tools, various factors such as the number of your locations and their interdependency as well as the duration needed to complete repairs at each location, and recover from the interruption should be taken into account.

Check these Business Interruption Insurance Sections to Ensure You Have Adequate Cover

1. Gross Profit Cover - This is measured through your business’s main income source. For example, if your company belongs to the retail or manufacturing industry, your gross profit is determined by the sales of physical stocks.

2. Fixed and Variable Costs Cover - Fixed expenses refer to business costs that are static such as property and machinery rental payments, employee wages, and payroll taxes while variable expenses are those subject to change. These include seasonal utility expenses and freight and packaging costs.

3. Increased Cost of Working (ICOW) and Additional Increased Costs of Working (AICOW) - A BI cover’s ICOW section helps pay for incurred costs directly tied to helping your company return to full operating capacity more quickly. On the other hand, AICOW reimburses costs that do not shorten the shutdown period but help sustain your business. Such costs include payments for additional staff members and rent of temporary facilities or offices.

What is the 12-Month BI Value Calculation?

Aside from utilising a BI worksheet and BI coverage analyses, 12-month BI value calculations are made to quickly compute a company’s expected loss per dollar of missed net sales. The process is utilised to come up with a BI value percentage, which is derived by dividing the computed value by the yearly net sales.

The methods implemented to determine Business Interruption values vary from company to company. Various factors such as organization complexity, industry type, and the transfer pricing between foreign and/or domestic partners affect the process, making the role of insurance brokers more crucial. Reach out to one today via Advisr for further assistance.
General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

All information above has been provided by the author.

ADVISR, ABN 17 613 588 266

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