1. Confusing values with exposures: We often hear from clients that they expect to only be down for six months after a loss. That may be true for some loss scenarios, but before exposures can be discussed, it's important to establish accurate values. A company's business interruption value is always an annual figure, equivalent to their fixed expenses and net profit for one year. Once that value is established, then conversations about exposure can begin. For example, a plastic products manufacturer reports an annual business interruption value of US$50 million at their key plant. If that plant suffered a catastrophic loss, a tornado or fire that completely destroyed the building and equipment, it would take about 18 months to rebuild and return to the same level of operation as before the loss. This client's exposure would be $75 million in this case.
2. Including all payroll in Ordinary Payroll: Ordinary Payroll provides coverage to allow a client to continue to pay an employee during a shutdown (thereby retaining a highly skilled and valued member of their team). As such, only the payroll and benefits for employees who would not be retained during a shutdown should be included in this category. Executives and management, those who would be utilized following a loss, should not be included under Ordinary Payroll; their payroll and benefits are a fixed expense and should not be deducted in this section. Doing so can understate the BI value.
3. Fixed vs. Variable Costs: Sorting out which expenses are fixed or variable is straightforward for the most part; however, some expenses can be tricky. Depreciation, for example, is often thought to be a variable expense because many clients believe that if a piece of equipment or building is damaged, you stop depreciating it. Let's look at it from a different perspective. Variable costs on a BI worksheet fluctuate with revenue; if there is no revenue, then you won't incur the cost. Does depreciation fluctuate with revenue? No, it does not and is, therefore, a fixed expense. If one piece of equipment is destroyed in a loss, clients will still continue to depreciate all the remaining functional equipment, as well as the building and structure. Depreciation is a continuing cost for the insured and should be included as part of the annual business income value.
Other expenses can be both. Electricity is an example of a semi-variable cost. A manufacturing facility may have a fixed amount each month just to have the feed into their plant; however, the usage portion of their bill would be considered variable. Helping your clients avoid these common mistakes pays dividends in terms of:
- More accurate values
- Proper coverage
- Greater client satisfaction
It's also important to remember that when it comes to BI worksheets—one size does not fit all. Not every line item on the worksheet applies to every client, and conversely, some clients may need to add items to properly calculate their values. In essence, the worksheet is a guideline to help clients estimate their BI values. If clients have spreadsheets customized to their business, those are acceptable as well.
Establishing accurate BI values is a vital step in calculating exposure to loss for any client. To better understand the importance of accurate BI values and for more tips on tackling BI worksheets, refer to Demystifying the BI Worksheet, a 2015 enVision article. BI worksheets and additional resources to assist with accurate BI calculations can be found on AFM Online. Also, your production underwriter can answer questions and provide more resources.