Business Interruption Insurance


As part of any corporate risk management programme, property insurance against fire, theft and natural disasters are fairly obvious since these unforeseen events are tangible in a sense that assets destroyed by fire and floods can be replaced or stocks and inventory stolen can be reimbursed. However, there is one aspect of risk management that is often overlooked by companies in Thailand and that is the intangible kind, where one can not readily touch and feel in the form of income forgone, gross profit and the going concern of a company. According to a reliable source, nearly 50% of the companies in the US that have been through a major disaster such as fire or floods, went bankrupt within a year after the disaster struck. This is because even if one is fully reimbursed by the insurance company for asset destroyed but many fixed expenses still have to be paid such as salary and wages, utility charges and interest expenses. And it is these items that can make or break a firm during the recovery period which can take several months to a year; during which time orders are often lost or cancelled, income forgone, production had to be suspended, factories may need to be relocated etc. This is where business interruption insurance (BI) comes in. In this issue of M&W, Khun Tadthep Sujitjorn, Assistant Managing Director of Samaggi Insurance Pcl. and Khun Adisorn, Managing Director of Ayudhya Insurance Pcl., very kindly provided useful information for us.

Business interruption insurance was first offered in Hamburg, Germany back in 1817 and since then it has become an integral part of property insurance, where companies in Europe and the US often take out property and business interruption insurance together. In a way it makes perfect sense because having one without the other is like insuring 50% of you risk. Besides, it is not possible to buy BI insurance without property insurance. The two policies are sold together. In the case of Thailand, not many companies are aware of such business risks and how to insure against them. In fact out of all the property insurance policies that have been sold today, only about 2-3% of the policy holders have also bought BI insurance; most of whom are multi-national corporations operating in Thailand.

What is Business Interruption (BI) Insurance?

Basically, a BI insurance will restore earnings before damage. It will ensure that the Gross Profit of a company shall not be affected in the event of unforeseen events such as fire, floods or any other natural disasters. For example in the last fiscal year, say 2003, your company made a gross profit of Baht 120 mm. and during Songkran this year (2004) your factory was severely damaged by fire. Had you taken out a property insurance together with a BI insurance, the insurance company will replace a new factory for you up to the sum insured and in addition will compensate your company to the sum of last year gross profit of Baht 120 mm .

Business Risks

What most people often forget is that replacing a factory or production facilities are easier said than done. Some of the obstacles include new building permits, new location if the old site is too severely damaged, new guidelines regarding industrial zoning and environmental protection could make the reconstruction even more difficult and costly, certain companies have highly specialized machineries that had to be imported which could take months, workers' compensation in the event of death in the line of duty, not to mention about the potential law suits from environmental groups or NGOs if your factory happen to contain highly toxic chemicals or waste materials, which many factories often do. These obstacles can and often delay the reconstruction of your production facilities by several months, during which time the company shall be highly vulnerable. Let's not forget that workers still have to be paid and retained even if the factory is no longer there, and worst of all, don't expect any sympathy from your bankers, suppliers or customers. In a highly competitive world, one person's loss is another person's gain.

BI insurance is not only useful for manufacturers and heavy industries, service industries such as hotels can also benefit because in addition to natural disasters, there are other business risks such as infectious diseases. In a famous example, a well known hotel in Hong Kong had all its bookings cancelled because the spread of SARS two years ago and the hotel was compensated for the loss of business because it had the foresight to take out a BI insurance. The other kind of risks that may interrupt your business are utilities black out (no electricity), denial of excess due to floods (workers can not get to work), suppliers' and customers' delay due to business risks. In these particular cases, your factory may be in tact but work is still interrupted because of someone else's problems. BI can help to insure all these unforeseen risks.

How Much Does It Cost?

In terms of insurance premium, BI is slightly more expensive than ordinary property insurance but only about 5% more. For example if your property insurance premium is Baht 100 pa. then your business interruption insurance premium should be around Baht 105 pa. All toll your premium should be around Baht 205 pa. The premium level really depends on the dependency of your business, manufacturing procedures, seasonality of your products, supply chains of raw materials used and any potential “bottle necks” in your operation. Companies that need highly specialized machineries or depend on specific raw materials will obviously be more expensive to insure, the same is true with seasonal products firms such as New Year cards manufacturers or department stores where the peak sale period comes only once a year for example. All in all BI insurance is really for companies of all sizes: industrial, services or even SMEs. However, the terms and conditions may differ somewhat between listed and non-listed companies. Usually, small non-listed companies will be insured on a Net Profit basis rather than gross profit because of the unreliability of their financial statements. Hence, the old joke about some companies keep 3 audit books: one for the mistress, one for the wife, one for the tax man. No need to say that the last two are always in the red!