Does the US do it better with regard to BI? David Henderson FM Global Claims Manager Northern Europe Operations.

HISTORY The BI industries in Europe and in the U.S. developed along independent lines. –“Sales” form in Europe; (Gross Profit) –“Production” form in the U.S. (Gross Earnings)

Similarities and Differences we’re going to look at… 1 Basis of Determining the Financial Loss 5 Make Up 2 Period of Liability 6 Additional costs to replace inventory used to reduce Time Element loss 3 Loss of Market 7 Finished Goods Valuation 4 Actual Loss Sustained

Sales Pound BI Value Business Interruption - What does the Policy pay for..

Basis of Determining Financial Loss Gross Earnings: Gross Earnings: Interruption of production or business operations which results in a loss of earnings Gross Profit: Gross Profit: Reduction in sales

PRODUCTION Basis of Determining Financial Loss – Gross Earnings SALES VALUE OF LOST PRODUCTION TIME REPAIRS COMPLETEEVENT

SALES Basis of Determining Financial Loss – Gross Profit REDUCTION OF SALES TIME SALES RESTOREDEVENT

Gross Earnings – Extended Period of Liability: EPL PRODUCTION TIME EVENT PERIOD OF LIABILITY EXTENDED PERIOD OF LIABILITY

Period of Liability Gross Earnings = Period of Restoration Gross Profit = Indemnity Period

Period of Liability: Gross Earnings - Period of Restoration PRODUCTION TIME EVENT PERIOD OF LIABILITY

Period of Liability: Gross Profit – Indemnity Period SALES TIME EVENT SPECIFIED PERIOD OF LIABILITY

Period of Liability - Sales Lag TIME EVENT GE PERIOD OF LIABILITY GE EPL PRODUCTION / SALES

Period of Liability - Sales Lag TIME EVENT GE PERIOD OF LIABILITY GE EPL PRODUCTION / SALES

Period of Liability - Sales Lag TIME EVENT GP PERIOD OF INDEMNITY PRODUCTION / SALES

Actual Loss Sustained - Indemnity Basis of the Business Interruption Policy Gross Earnings: link between production and sales Gross Profit: reinforcement of indemnity principle of insurance

Make - Up – Insurers Credit SALES TIME EVENT GE POLGP POL

Gross Earnings: –Credit within a reasonable period of time Gross Profit: –Credit within the period of liability Make - Up – Insurers Credit

If the sale can still be made 6 months after the loss, the period is reasonable Even if the time period is less than a day, if the sale is lost the period is unreasonable Make - Up Reasonable Period of Time?

Additional Costs to Replace Inventory Covers additional costs to expedite replacement of all inventory which was: Used to reduce the loss otherwise payable Used to reduce the loss otherwise payable Expenses considered after expiration of Period of Liability Expenses considered after expiration of Period of Liability Limited to the extent of Gross Earnings or Gross Limited to the extent of Gross Earnings or Gross Profit Loss reduced during the Period of Liability

Gross Earnings:Selling price Gross Profit:Replacement cost Benefits of either approach? Finished Goods Valuation

Summary Gross EarningsGross Profits Bases of Determining Loss of Revenues Period of Liability Loss of Market

Summary Gross EarningsGross Profits Bases of Determining the Financial Loss Loss of production or operations which results in a loss of sales Loss of sales Period of Liability Time to return production to pre- loss levels Specified period of time Increase in Loss due to Loss of Market Excluded but… (EPL?) Covered to the extent it is a direct result of the loss.

Summary Gross EarningsGross Profits Actual Loss Sustained Make up Additional costs to replace inventory used to reduce Time Element loss Finished Goods Valuation

Summary Gross EarningsGross Profits Actual Loss Sustained Required Make upCredit in a reasonable period of time Credit in Period of Liability Additional costs to replace inventory used to reduce Time Element loss Covered Finished Goods Valuation Selling PriceReplacement Cost

Basic Business Interruption Coverage Types Gross EarningsGross Profits referred to as “Production” or “Earnings” Based Forms referred to as “Sales” Based Forms Primary Advantage: Unlimited period of indemnity, i.e. TE coverage continues until production restored to pre-loss level Primary Shortcoming: No standard coverage for continuing loss of sales Best for: Loss scenarios involving extended production downtime Most prevalent usage: United States Primary Advantage: TE coverage lasts until sales restored to pre-loss level Primary Shortcoming: Fixed maximum time limit on period of indemnity Best for: Loss scenarios involving limited production loss with protracted loss of sales Most prevalent usage: Outside the United States

Which form is better?

How to choose? Typical reasons Geographical location Tradition Comfort zone Better reasons Coverage suited to actual loss circumstances Coverage response linked to client’s market conditions Coverage suited to individual risk profile Coverage that generates best possible payout

What type of Client may be better with which form.. Aluminium Smelter –Probably……Gross Earnings Shampoo manufacturer –Probably….. Gross Profits Defence Industry Manufacturer –Probably…..Gross Earnings Mining Company –Probably…..Gross Earnings Automotive Component Manufacturer –Possibly……Both City Centre Department Store –Possibly……Gross Earnings

QUESTIONS?