No matter how meticulously we plan or prepare for unforeseen circumstances, undesirable events remain inevitable. This truth is particularly relevant for businesses, which often encounter challenges beyond their control which can disrupt their regular operations. In times of turbulence, having a robust risk management strategy becomes indispensable.
One element of this should be an equally robust and bespoke Insurance portfolio and a vital element of this should be business interruption insurance.
What is Business Interruption Insurance?
Business interruption insurance is a widely available commercial insurance section designed to help companies navigate interruptions to their operations and income following unexpected material damages. Such damages may stem from various sources, such as natural disasters, fires, and political unrest.
For example, suppose that your business is a retail provider selling stationary, a storm inflicts physical damage on your store, and the stock therein compels you to shut down for repairs for weeks or longer – leaving you unable to trade. You would naturally expect your insurance to reimburse you for the stock loss.
However, what about the loss of income when you cannot trade? That is where business interruption insurance plays a vital role, as it could compensate for the financial damages incurred by your inability to continue normal working operations.
This sets business interruption insurance apart as an essential element of any commercial insurance portfolio. It’s ability to cover the loss of income experienced by a business during a disruptive period. This includes coverage for fixed costs like rent, salaries, and utilities, ensuring companies can fulfil their financial obligations even when faced with unforeseen circumstances.
Underinsured business interruption
So, you have cover, but under-insurance can also be catastrophic to business continuity and the ability to recover, even if cover for assets is in place. On average, 43% of business interruption insurance is underinsured by 53%, according to the Chartered Institute of Loss Adjusters (CILA).
Three key factors need to be considered when it comes to setting the correct sums and indemnity periods for Business Interruption (BI) insurance:
- Sum insured – The sum insured must be calculated based on the insurance gross profit, not necessarily the accounting financial gross profit. This requires a deep understanding of a client’s financial records and its operating models.
- Indemnity Period – An indemnity period associated with BI insurance refers to the period of time it will take for the business to recover from a worst-case scenario. The appropriateness of the indemnity period needs to take into account factors such as the nature of the business and its assets, such as specialised machinery and equipment, seasonality of the business and competition within the market.
- Business Continuity – While business continuity in itself is not an insurable risk, poor risk management can render a business uninsurable. Risk mitigation efforts undertaken by a business has a fundamental effect on the eligibility for insurance and the cost of insurance. Another critical aspect that is considered is the interdependency of different business units, and what impact each has on the continuity of the entire business. A catastrophic event in one business unit could impact other divisions or subsidiaries across the entire network as well as the ripple effect on customers and suppliers not to mention one’s own staff.
The Significance for South African Businesses
The need for South African businesses to be well-prepared for significant business interruption events has never been more pronounced. Historical events such as the July 2021 riots, the catastrophic KZN floods of April 2022, serve as stark reminders of the unpredictable nature of disruptions.
The riots impacted 89% of businesses in the affected provinces, while the KZN floods influenced 826 companies. In these challenges, having a robust insurance portfolio which includes a business interruption insurance section becomes instrumental.
Dismissing the notion with a “it will never happen to me” mindset is, at best, naive and, at worst, irresponsible. RBS Insurance understands these unique risks. We stand ready to help you and your business tailor a solution to cater to our unique and volatile environment in South Africa.
About RBS
Risk Benefit Solutions, better known as RBS, originated as an entrepreneurial-focused services business in 1998 and today is one of the largest fully-fledged black-owned insurance brokers in South Africa and a Level One BBBEE contributor. Celebrating 25 years in business this year, our growth has contributed to offering clients a unique approach to risk management by positioning our skilled resources as an extension of our client’s risk management team. Our company covers various services, including Insurance Broking, Risk Management, Commercial and Corporate Risk Advisors, and Corporate Vehicle Hire Services. With its head office in Cape Town, RBS has offices in Gauteng, the Eastern Cape and globally, represented through its board membership with WING (Worldwide Insurance Network Group).