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Business Interruption: How lockdowns impact your insurance now

(remembering you're insuring the future and not the past).

Matt Naylor
June 2021

Over a year since the first COVID lockdown and we are now seeing the serious impact it has had on business profits. Auckland businesses were additionally required to navigate their way through various lockdown periods. This, of course, had an effect on turnover at the time, but the flow on now also impacts the level of insurance cover you require this year.

So how do you calculate your projected turnover?

Each year the GSI team work through a detailed assessment of our clients previous year’s trading alongside business activities to effectively mitigate risks and reduce premium wastage. Part of this process includes using past financials to forecast future profitability through our Business Interruption calculation process. With sales being reduced, if we were to use last year’s financial figures to determine your insured profit, it would lead to significant underinsurance because it doesn’t take into consideration twelve months of trading without lockdowns. We analyse your business financials and make adjustments for the expected growth trend during your policy period and indemnity period (remembering you're insuring the future and not the past).

An example...

To look at an example, one of our clients in Auckland (affected negatively by the loss of trading hours during lockdown), had an annual turnover of $407,000 for year-end 2020 and were on an upward sales trend because their business was still relatively new. Their average monthly turnover was around $34,000. When COVID hit, it more than halved their income in the months affected by lockdowns, reducing one month’s income in particular to almost $0. Other months following the lockdown were slow to recover but when they had the ability to stay open for sustained periods their sales increased to record highs. We worked with the client to establish that following lockdown their average turnover was actually sitting somewhere closer to $50,000 a whopping 50% increase in sales when compared to year end 2020 and 33% higher than what the 2021 year end financials stated.

If we had simply used the 2021 financials to establish the business interruption sums insured the clients insured profit would have been $526,000 for an 18 month indemnity period. Following discussion with the client and further analysis by GSI it was established the business interruption sum insured when accurately calculated should be $882,822 for an 18 month indemnity period.

The real cost of underinsured business interruption insurance

If we had not taken the time to work with the client to clearly establish future sales were likely to exceed historical sales the client’s business interruption insurance would have been underinsured by a staggering $356,822 and they simply would not have financially survived a major loss such as fire or natural disaster.

The premium cost increase for this change was insignificant, but the fallout for being underinsured can be catastrophic to your business in the event of a claim. This highlights the importance of process and taking the time to assess every business and client individually.

What to do next

If your broker has never asked for your financials or growth trends and if you were affected by lockdown, talk to your Broker about realistic turnover figures and correcting your sums insured, or get in touch and we can help you.