Focus on: Business Interruption Insurance

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Business Interruption Insurance: One Size Does Not Fit All

Business interruption (BI) insurance is a complex topic and even the most experienced risk professionals can find it difficult to navigate both the intricacies of cover, and the often onerous claims process.

In most cases, BI insurance is designed to compensate a business for its net loss of income as well as for any unplanned increases in operating expenses, such as the cost of using temporary facilities. While this may sound simple, getting it right is not straightforward for large industrial organizations. There are many variables in financial forecasting, and predicting reductions or increases in operating expenses in the event of property damage, often requires making the intangible, tangible.

If you aren’t confident in the specifics of how your BI policy mechanism works, it may be time to take another look.

Most ‘off-the-shelf’ BI coverages fall short in meeting the specific circumstances of energy and power operations — for such a wide range of usage cases it’s impossible to apply a ‘one size fits all’ approach. The rapid pace of growth in the renewable energy sector, the increasing interdependencies at multi-site facilities, and the sheer range of contractual arrangements across complicated energy value chains, have resulted in a mixture of approaches to BI coverage.

Aligning a BI policy mechanism with the actual commercial arrangements of a business is essential to ensuring adequate cover and a smooth claims process. Historical and forecast data — beyond standard accounting metrics – is critical, but so too is aligning calculations with the basis specified in the policy wording. Too often during a claims process, an organization is unaware that the value insured by the policy is different to the basis that has been used by accounting teams for budgeting and forecasting. The onus is on risk professionals to ensure that accounting standards, metrics, and calculations defined in the policy terms are aligned, and are appropriate for their organization’s commercial and regulatory arrangements. More importantly, an organization needs to ensure it has the information, systems, and capability to prepare loss data on the basis defined in the policy. Or, to modify the policy definitions to align with the basis of the business forecasts.

The following are some examples that different segments of the energy and power industry should consider, and factor into BI policy mechanisms, to ensure that claims will reflect the actual loss suffered by the insured.

Traditional or renewable power facilities are subject to a wide variety of contractual arrangements. Operator obligations often reflect local regulatory requirements and variables such as the power mix, generation hierarchies (for example, baseload versus peak shaving), power purchase agreements, and use of grid infrastructure. Power risks can also feature financial exposures that lag property damage events by months or even years, and standard BI coverages rarely cater for these circumstances.

In the offshore segment, BI coverages typically assume a steady production rate over time, and apply daily limits based on this principle. Upstream operations that are in the process of bringing additional production on-stream from a new field, need to ensure full coverage for their changing production profile. Otherwise, higher production rates during the ramp-up may not be covered, and a BI loss could be capped at the average production value for the period.

Midstream operators of transmission or storage systems are often faced with unique commercial circumstances. Regulators may define the terms of agreements with shippers and off-takers, and the contractual obligations on the operator can be complex. Traditional BI coverages are rarely well-suited to the unique range of exposures or the contractual obligations of the systems at risk.

Many downstream BI policy mechanisms use reduction in revenue as a proxy to calculate the relative impact of a BI loss, and to scale BI claim payments. This isn’t always the most appropriate measure for complex, margin-based businesses, which can suffer a substantial financial loss while maintaining a constant revenue. Oil refineries for example, do not typically use revenue to measure financial health therefore, reduction in revenue would be a poor indicator of the overall impact of a loss.

If you aren’t confident in the specifics of how your BI policy mechanism works, it may be time to take another look.

Our Energy & Power practice includes a dedicated BI engineering team and policy wording specialists, who regularly collaborate to develop best-in-class BI coverages for Marsh Specialty clients.

Article

Focus on: Business Interruption Insurance

Business Interruption Insurance: One Size Does Not Fit All

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