Business interruption, including supply chain disruption and vulnerability and cyber incidents, is the top risk for businesses world-wide, according to the 2017 Allianz Risk Barometer, and yet BI insurance continues to be a grudge purchase for many SMEs.
‘She’ll be right’. ‘It won’t happen to me’. ‘A penny saved is a penny earned’.
When it comes to client excuses and business interruption (BI) insurance, you’ve probably heard them all before.
But with BI insurance being one of the most misunderstood, and therefore overlooked, business insurance policies, it’s imperative that you as a broker help potential clients understand the value this crucial cover provides.
“It’s a small business that’s most likely to say ‘I don’t need that, she’ll be right!’. They could of course not be further from the truth,” says Leo Quoyle, Underwriting Manager at Interruption Underwriting Agencies.
Let’s face it, in the eyes of many clients, insurance is a grudge purchase. It’s only when they need BI cover that they come to fully appreciate it. By then it could be too late.
FIVE TIPS ON HOW TO TALK TO CLIENTS ABOUT BI INSURANCE
And unfortunately due to its very name, BI cover is often misunderstood by potential clients.
“We’re not insuring net profit, we’re insuring net profit plus all the fixed or ongoing business expenses,” says Dr Allan Manning, Managing Director at LMI Group, whose business helps brokers and business owners calculate a claim after losses have occurred.
“Once a client understands that business interruption is going to keep paying the financing bill, the lease payments on their car, their staff, then they see that it’s vital.”
BI in a nutshell
QBE Insurance Australia product specialist Andy Kalnins explains that BI insurance deals with continuity of income following loss of or damage to insured property.
“The cover will pay for ongoing costs that continue regardless of whether the business is closed or substantially affected. It also covers additional costs incurred to minimise the effects of the closure or downturn, plus net profit and/or loss,” Kalnins says.
We’re not insuring net profit, we’re insuring net profit plus all the fixed or ongoing business expenses.
“The majority of claims are triggered by fire or weather events.”
Dr Manning adds that about 70 per cent of claims arise because of damage to property, while 30 per cent arise because of dependencies away from the premises, otherwise known as “indirect impact”. Familiarising yourself with these potential offsite interruptions can be a great selling point for business owners adamant they have their shop in order.
“The consequences of such ‘indirect impact’ will vary according to the type of business conducted,” says Kalnins.
For example: “Almost every type of business is affected when public utilities suffer damage and where these services cover a wide geographic area major delays can be experienced in relation to restoration, especially where catastrophe scale storm or bushfire events occur.”
Market appetite and challenges
Dr Manning says with approximately six out of every ten Australian businesses not covered, there’s no shortage of potential businesses to target.
“And because it’s a profitable class for insurers, in the main, most… are happy to underwrite it,” he says.
While Quoyle says market appetite can be considered strong, he admits that the take-up rate of BI has always been a major issue facing the sector.
BI COVER: FOOD FOR THOUGHT
In order to increase take-up, some believe the claims process in particular needs to be simplified.
“The loss adjusters can sometimes make it so difficult for a customer to prove their loss, put them through so many hurdles that a lot of clients just go, ‘stuff it, this cover’s no good for me’,” Dr Manning says.
“Then they suffer a big loss and need it. So there’s got to be a simpler way.”
One important factor for brokers to consider when hunting the right product for their client is the indemnity period – the length of time that a BI policy will respond to an interruption for.
“The longer the selected period generally the better,” says Quoyle. “An interruption to the business may go on for some time after the physical loss has been reinstated”.
Kalnins adds that indemnity period generally starts from the date of property damage caused by an insured event, although some wordings extend the start date to when the financial results were first impacted.
The emerging risk popping up on everybody’s radar is cyber. But just one in 10 Australian businesses are taking out some form of cover.
“We’re not selling anywhere near enough,” laments Dr Manning.
“Customers just think it will never happen to them. But criminals are making more money out of cyber now than they are out of drugs. It’s an enormous business.”
The good news, however, is that interest in BI cyber cover is increasing. Covers available include first party costs, business interruption and third party claims associated with unauthorised access to data and privacy breaches.
Callum McMillan, National Commercial Manager of Financial Lines at Zurich, says it’s encouraging to see SMEs begin to appreciate the potential severity of cyberattacks.
An interruption to the business may go on for some time after the physical loss has been reinstated.
“However greater business resilience is needed. It’s important for Australian businesses to be aware that cyber is an interconnected threat which can impact all businesses, no matter their size,” McMillan says.
“SMEs can be targeted as a result of their interconnectedness with larger and third party
organisations and may not have the necessary protections in place.”
Other emerging risks underwriters have their eye on, according to Kalnins, include the increased frequency and/ or severity of storms, water levels and bushfires due to climate change.
While all businesses have an exposure to BI to some degree, retailers and manufacturers are the two types of businesses most at risk, while hospitality also make for good potential clients.
Quoyle says brokers should kick off their sales spiel with one simple line to clients: “What are you going to do when the fire engine leaves?”
Broker Anne Hartree, Director at ALH Insurance Services, says it’s important for brokers to highlight the struggles their clients will face if they get caught out without proper BI cover.
“Many clients will say that if something happened to the building they were operating out of that they would simply move into another location and keep trading,” she says.
“It is only after a meaningful conversation that a client will understand that while that idea is quite simple, in practice it’s both costly and time-consuming.”
She also recommends simplifying the complicated and technical language used in policy documents.
Talk to them on their level. “There is a huge opportunity for a broker to be able to translate the complicated jargon into simple business language. Why not say something like ‘business income protection’?”
After all, the goal is to ensure business owners have the protection that allows them to truthfully say ‘she’ll be right, mate’.