Home (re) Insurance Latin America When Catastrophe Strikes: The Cost of Business Interruption

When Catastrophe Strikes: The Cost of Business Interruption

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Natural disasters seem to be occurring more frequently and with more intensity than they did fifteen years ago. According to a 2018 report, Weather, Climate & Catastrophe Insight, from Aon’s Reinsurance Solutions, 42 individual billion-dollar natural disaster events occurred in 2018, which was above the average of 31 events dating to 2000 and higher than the 36 events in 2017. In total, the economic costs of 2018’s 394 natural catastrophe events were US$225 billion, with insurance covering US$90 billion of the overall total. This created the fourth costliest year on record of insured losses.

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Wildfires, hurricanes, earthquakes, and extreme temperatures all contribute to the billions of dollars being paid out as insurable losses. These are the types of risks that make it difficult to pre-assess since they are natural, and in some instances the intensity of the event is not predictable.

The risk of a catastrophic event causing a short term, long-term, or permanent shutdown of a business is growing.

How much would such an interruption cost your business?

How much a catastrophic event will cost your business depends upon several factors. These could include but aren’t limited to:

  • Your ability to mitigate your own losses by preparing for the catastrophe, such as a wild fire or hurricane, headed towards your place of business
  • Having a loss prevention plan in place
  • Setting up a temporary location
  • Using other owned facilities to help mitigate lost sales
  • Using a competitor to produce your product at an incremental cost until you can reopen
  • The actual downtime caused by the event
  • Using your own employees to clean up versus using outside assistance

How we calculate business interruption losses.

As forensic accounting specialists, we are often brought in to evaluate and substantiate the losses a business suffers caused by a natural disaster or other catastrophic event. In general, to calculate the business interruption loss an insured incurs we look at the following:

Historical revenues and expenses: Utilizing historical data and financial information of the business, we project how much the business would have been expected to earn had the interruption not occurred.

Current revenues and expenses: Despite the interruption, was the business able to continue bringing in any amount of revenue? What expenses continued during the interruption?

Deducting actual revenues achieved during the loss period (if any) from projected revenues yields lost revenues during the period. In reviewing historical expenses as a percentage of historical revenues, we can project what expenses should be during the loss period as related to the calculated lost revenues. Finally, deducting projected non-continuing (or saved) expenses from calculated lost revenues, we can determine the business income loss value.

Business interruption is obviously a complex issue with a wide range of implications, from financial to legal and everything in between. If you’re facing a loss, you may be asked to answer some of the following questions:

  • Were you able to mitigate potential lost sales at other locations?
  • Were incremental costs incurred to mitigate potential lost sales at other owned locations, or were competitors utilized?
  • Were contracts canceled as a result of the event?
  • Is the business seasonal?
  • Are there any outside factors that may be affecting the potential lost sales that aren’t related to the loss event?
  • Did the down time exceed the waiting period for your insurance policy?
  • How long do you expect to be down, fully or partially?

How much business interruption coverage do you need?

The increasing incidence of natural disasters and other catastrophic events makes the need for appropriate insurance coverage evermore clear. But how much coverage do you need? The amount of insurance needed is based on several factors, some of which include:

  • Your annual Business Income Value
  • The number of owned locations to insure
  • Whether it is possible to mitigate potential losses via other insured locations

Based on answers to the above along with a more detailed conversation about your business with your agent and risk manager, they will help you determine what is the best amount of coverage to carry.

Be prepared.

There are some simple things you can do to be prepared for a potential business interruption loss, such as knowing your exposure amount and accounting for any changes in exposure, backing up your financial information on a regular basis, understanding your insurance coverage, and knowing who to contact in the event of a loss.

While no one wants to think a catastrophic event could interrupt their lives or their businesses, it’s best to prepare for the worst.

Author: Kaye Shelton

Other Lower Forensics International articles: The rise of the ITM: Focus on Brazil

Contact Joe Scarlato
President – Director of Global Operations at Lowers Forensics International

Contact Carlos Rivera Senior Vice President of Operations at Lowers Forensics International

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