How to help commercial clients avoid the pitfalls of under-insurance

Commercial insurance is essential to protect the assets and finances of a company, yet often it is viewed as a complicated and expensive responsibility. The South African commercial sector is traditionally underinsured, and commercial insurance continues to come under pressure due the slow recovery of the economy.

As an expert intermediary, you are best placed to guide businesses in getting adequate insurance cover - as no two businesses are the same – and in overcoming the challenge of underinsurance. When clients experience business interruption they often find their cover falling short, which may mean they are unable to continue trading and they could be forced to close their business. Let’s look at the common pitfalls of under-insurance and how business interruption insurance can protect commercial clients.

Watch out for these three common pitfalls of under-insurance:

1. Calculating gross profit correctly

The most common errors that are made when insuring for business interruption occur when the gross profit of a business is miscalculated. The client is insured against applying the rate of gross profit to the reduction of turnover, not against the total reduction in turnover.

The gross profit sum insured should:

• Include VAT
• Reflect a 12-month period where the maximum indemnity period is 12 months or less; or the appropriate multiple of the annual turnover where the maximum indemnity period exceeds 12 months.
• Cater for trend, taking cognisance of a loss that may occur close to or at the end of the insurance period.

2. Understanding the difference between financial and insurance gross profit

The financial gross profit takes account of various direct manufacturing costs, for example, wages, factory overheads, water and lights. The insurance gross profit, however, also takes account of the uninsured costs, as chosen by the client. These uninsured costs would be indicated on the policy schedule, and as standard would include "purchases; bad debts; and discounts received and allowed". These are usually costs that vary in direct proportion to changes in turnover.

The insurance rate of gross profit needs to be sufficient to cover the ongoing costs, such as wages, factory overheads, water and lights, and also maintain the net profit levels of the business.

3. Ensuring that an adequate indemnity period is chosen

The indemnity period chosen needs to be sufficient to allow for the building reinstatement, sourcing/ ordering and commissioning of a new plant, equipment, machinery etc. as well as returning to the pre-loss production and turnover levels - in other words, the recovery period. The length of the period would need to be sufficient to provide cover from the date of the incident until the business is no longer affected by the disruption, and the turnover, as originally expected, is restored.

It is important to fully understand the nature of your client's business. You may have to call upon their auditors or accountants to provide further insights and information.

Santam’s Business Interruption Calculator

Business interruption is certainly one of the biggest risks a company can suffer and can be difficult to estimate. Santam has created an innovative online tool to make sure that your client’s business interruption sum insured is calculated correctly and the claims process is as easy as possible. 

Helping clients avoid under-insurance

Business owners often fall into a trap of underinsurance because they are unaware of the repercussions. For example, if equipment is worth R500 000 and it is only insured for R400 000, only 80% of the loss will be paid out in the event of a claim - a loss that can be financially crippling during soft economic times.

It is important to often check in on clients to ensure that the value of their possessions is updated regularly.  As their risk partner, you understand the enormous pressure a commercial business is under to produce results even in times of reduced income. Remind clients that cheaper doesn’t mean better and that they must always compare the cover, exclusions, excess and all the terms and conditions before deciding on an insurance provider. They must be able to rely on an insurer to pay their claim, assist them in the claims process and give them good business insurance advice.

With the wide spectrum of insurance products available, clients need the expert guidance of an intermediary who knows which insurance products are best suited to mitigate the risks that are specific to a business and its industry.

Santam supports our network of intermediaries with unique client risk profiling techniques, ongoing training, and an unmatched geographical presence and advice. We also share legislative, commercial and scientific risk modeling expertise and insights to help you better manage the potential risks and advise clients appropriately.

To find out more about the business interruption insurance offered by Santam, speak to your Relationship Manager or get in touch with Santam. For more advice tailored to intermediaries, visit our blog for useful more articles. Read more about the new Santam Risk Assessment App, which fits close to 100 years of risk expertise into the palm of your hand.