Presentation LOP

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Bajaj Allianz General Insurance Co. Ltd.

LOSS OF PROFIT (FIRE) INSURANCE

V.P. Sharma

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Policy coverage:

This policy covers financial losses of the risk due to interruption in business following a loss or damage to insured property covered under material damage policy (Fire & Special Perils Policy).

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What we pay ?

Loss of Gross Profit due to reduction in T.O.

following an indemnifiable loss under

Concurrent Material damage policy.

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Loss of Net Profit

Continued fixed expenses – standing charges

Increased cost of working

In other words we pay

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Who can be insured ?

1) Any risk having M.D. Fire policy in force.

2) Unit should be earning Gross Profits.

3) Net loss situations can also be covered but No policy to risks with Gross Loss.

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What happens when a loss occurs?

• Loss arising out of damage to material

• Interruption in business

• Loss of Goodwill

• Loss of Market

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Consequential losses not payable under FLOP policy

• under-insurance under the material damage policy

• difference in value of property at the time of damage and

after repairs.

• deterioration of undamaged stock after damage occurred

• failure to recover debts of pre-damage trade owing to destruction

of records

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• fine, damages and or penalties under contracts arising

from breach of contract in consequence of damage

• third-party claims other than referred above

• loss of good will / loss of market

• cost of preparation on insurance claims

• litigation costs connected with insurance claims

All the above are out side the purview of LOP policy

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Material Damage Proviso There is a policy for PD against the same peril

PD insurer has admitted liability under the policy

BI claim admissible even if property damage claim is not paid on account of Deductible.

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Interruption period

It starts from the date of loss & ends when the business resumes normal production levels.

Indemnity period • to be selected by insured at inception.

• “The period beginning with the occurrence of the damage and ending not later than….. Months thereafter during which the results of the business shall be affected in consequence of the damage”.

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POLICY PERIOD

March 1Date of loss

Jan 1Policy inception

Dec 31Expiry date

INTERRUPTION PERIOD

Feb 15Business back to full stream

INDEMNITY PERIOD

CASE 2 – LOWER INDEMNITY PERIOD (9 months)

Indemnity period

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Sum Insured :

It should represent Annual anticipated Gross Profit duly adjusted as per the trend of business.

Addition method

G.P = Net profit + Standing chargesStanding charges alone can be covered

orG.P.= Standing charges – net lossStanding charges alone should not be covered in Net loss situation.

Difference method G.P. = (T.O. + Closing stocks) – ( Variable expenses + opening stocks)

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For indemnity period of 12 months or less ( min 3 months) –

Sum insured should be Annual gross profit

For indemnity period more than 12 months (Max 36 months) –

Sum insured to be proportionately increased

RATING TABLE

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RATING:

For Industrial Premise :

LOP rate should not be less than 125% of the average

fire rate of contents of process block.

For Non Industrial Premise : LOP rate should not be less than 125% of the averagefire rate of contents of whole premises.

25% loading shall be applied for continuous operationPlants.

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Fundamentals;

Sale value of the goods ( turnover) = T

Variable cost = V

Fixed cost = F

Net Profit = P

T = V + F + N.P.

When the plant comes to grinding halt, the insured losses the turnover T and therefore does not incur V but keeps loosing economically both F and P

G.P. = T – V

N.P.= G.P. – F or N.P. = T – V - F

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Standing charges : Fixed expenses which continue to occur irrespective of production levels.e.g. Depreciation, rents, salaries, interest on loans, administrative costs, advertisement expenses etc.

Variable expenses: These vary with production levels. Nocost incurred when no production.e.g. R.M. cost, freight inward, electricity,labour cost etc.

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ANNUAL TURNOVER

Annual turnover is defined as the turnover during the 12 months immediately before the date of damage. This is used in computing adequacy of sum insured

STANDARD TURNOVER

The turnover during that period in the twelve months immediately

before the date of the damage which corresponds with the

indemnity period”.

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RATE OF GROSS PROFIT

“The rate of gross profit earned on the turnover during

the financial year immediately before the date of the

damage” i.e. G.P. / Annual T.O.

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INCREASE IN COST OF WORKING

In respect of increase in cost of working; the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in turnover is considered under the policy during the indemnity period, with a proviso that such expenditure is not to exceed the sum produced by applying the rate of gross profit to the amount of the reduction thereby avoided.

Increase in cost of = Rate of gross profit X

working allowed < shortage in turnover avoided

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Computation os loss

The rate of gross profit is the ratio between( P +F) and the turnover(T). In other words

Rate of gross profit = P + F T

This when multiplied with reduction in turnover produces the loss suffered by the insured as indicated below:

Gross Profit loss = P + F X T (reduction in turnover) T

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THE PRINCIPLE OF THE STANDARD LOP POLICY

In case of a loss making unit the turnover equation changes as under:-

T = V (variable) + F (fixed cost) - L (Loss)

From the above it can seen incase of reduction in turnover the insured suffers fixed cost - loss.

In other words the rate of gross profit = (F- L)/ T

The loss adjustment then becomes (F-L)X T ® T

In a loss making concern, if insurers cover only standing charges (fixed cost) the insured will gain more out of the policy than running the business since the loss he incurs is not adjusted in the claim

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Average clause:

U.I. factor ( during currency of policy) = Sum Insured

Sum required to be insured

sum required to be insured = R.O.G.P. x A.T.O. x I.P

U.I. factor ( after F.Y.) = Sum Insured

Actual G.P.

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EXTENSIONS

The insured’s profit might not only depend upon the

continued functioning his operations but also of the

operations in the premises of his suppliers, customer etc.

The usual extensions that an LOP are

• Suppliers premises

• Customers premises

• Electricity stations, gas works and water works

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Supplier’s extension

• Rating for Suppliers’ Premises extension depends upon• A) % dependence on supplier• B) when there are more than one supplier• –whether dependency is on no. of suppliers for similar goods.• - whether dependency is on no. of suppliers for different goods.

• Premium for extension ( when only one supplier)= Basis rate + M x ( Av rate of supplier – basis rate of Insured’s

premises)M is the % to be taken from the table based on dependency.

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Premium for extension ( when two or more supplier supplyingsimilar goods)

= Basis rate + M x ( highest Av rate of suppliers – basis rate of Insured’s premises)

M is the % to be taken from the table based on dependency.

Minimum rates for addition to be taken from the table if the difference is not significant.

Table for rate calculation

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In the case of a number of separate suppliers supplying different components, the following additional rates should be charged:-

Two Suppliers – the difference between the highest of the respectiveaverage rates of the suppliers’ premises and the basis rate for the Insured’s premises loaded by 50%

Three Suppliers - the difference between the highest of the respective average rates of the suppliers’ premises and the basisrate for the Insured’s premises loaded by 100%

Four Suppliers - the difference between the highest of the respective average rates of the suppliers’ premises and the basis rate for the Insured’s premises loaded by 150%

SUPPLIER’S’S EXTENSION

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Extension to cover Customers’ premises

The cover is against consequential loss to the insuredsarising out of their customers not taking delivery of the products, exclusively manufactured for them, as aresult of the operation of the insured perils at the customers’ premises).

Premium will be 120% of supplier’s premises extension

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Coverage of Property stored at other locations:Additional premium to be charged @ 2.5% per location subject to max. of 20%.

Extension to Cover Suppliers’ Premises and Customers’ Premises:

Consequential Loss (Fire) Policy may be extended to Suppliers’ Premises and Customers’ Premises.

Note:1) It is permissible for Insured to select perils to suit their

requirements, but extension may be granted only for those perils which are covered under C.L (Fire ) Policy.

2) The indemnity period under the Suppliers/Customers extension shall be identical to that under the main Policy.

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Extension to cover loss due to accidental failure of public electricity/gas/water supply:

Additional Rates (for each utility)

Rate Standard Fire & Special Perils Policy0.80 %oStandard Fire & Special Perils Policy less RSMD 0.70 %oStandard Fire & Special Perils Policy less STFI 0.55 %oStandard Fire & Special Perils Policy less RSMD & STFI 0.45 %oStandard Fire & Special Perils Policy with earthquakeextension 1.30 %o

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Important norms

a) 25% extra is to be charged on the above rates for continuous process plants.b) Utilities belonging to the insured’s other units in the same compound may be treated at par with “Public utilities” for the purpose of granting utilities extension.c) The rates for this extension are specific rates and have to be charged on a sum insured equivalent to the annual gross profit irrespective of the indemnity period selected under this extension or under the main policy.

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COVERAGE OF WAGES

A) DUAL WAGE BASIS - Coverage is available for100% indemnity for initial few weeks & reduced indemnity as selected for reminder of indemnity period. Wage table

Option to consolidate provision - Table

B) Prorata basis – Wages can be insured for a selected period in weeks upto 52 weeks.Table

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Return of Premium:

Allowed when the actual annual G.P. if less than S.I. Actual premium of declared G.P. is calculated & balance if refunded subject to

- Annual G.P. is declared within 12 months of expiry

of policy.- Max. refund is 50% of premium collected.

- If a claim is paid, it is added to the G.P. declared with the result – refund is reduced.

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Accumulated Stock Clause:

Where the insured maintains sufficient stock of finished goods from time to time as a matter of business policy, the Insurers may, at their discretion, attach the following Clause to the Consequential Loss (Fire) Policy issued on Turnover Basis:-

“In adjusting any loss, account shall be taken and an equitable allowance made if any shortage in turnover due to the damage is postponed by reason of the Turnover being temporarily maintained from accumulated stocks of finished goods in the Insured’s warehouses.”

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Memo 1:

If during the Indemnity Period goods shall be sold or services shall be rendered elsewhere than at the premises for the benefit of the business either by the Insured or by others on his behalf the money paid or payable in respect of such sales or services shall be brought into account in arriving at the Turnover during the Indemnity Period.

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Memo 2: UNDERINSURANCE

If any Standing Charges of the business be not insured by this policy then in computing the amount recoverable hereunder as increase in Cost of Working that proportion only of the additional expenditure shall be brought into account which the sum of the Net Profit and the Insured Standing Charges bears to the sum of the Net Profit and all the Standing Charges.

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Basis of LOP policies

a) Turnover basis

b) Output basis

c) Revenue basis

d) Difference basis G.P. = (T.O. + closing stocks) - ( Variable exp + open. Stock)

e) New business clause.

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Excess

• Most BI policies carry a Excess• Intention to avoid small losses• Varies from industry to industry• Can be either value or time• In case of time – deduction is in terms of value

equivalent to the time

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LOSS ADJUSTMENT

A valid claim under LOP policy arises when the following conditions are met with:

• The building or other property insured and used by the insured at the insured premises for the purpose of the business must have been destroyed or damaged by the peril insured.

• Due to which damage/ destruction, the business(covered) shall be affected, causing shortage in turnover/ output

• Which shortage could not be made good subsequently within the maximum indemnity period,

• And liability for the damaged building/ machinery is admitted under a ‘Material Damage’ policy.

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LOP rates in Petro Chemical Industries

Indmn. Per. 6 9 12 15 18 24 30 36

standard rate 225 270 300 290 285 270 255 240(% of basis rate)LOP rates ( % of basis rate) based on LOP claims exp. For latest 5 policy periods ( exceeding 4 years).

Claim ratio 6 9 12 15 18 24 30 36Upto 20% 100 108 120 117 114 108 100 100Upto 50 %

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Thanks & Best wishes

Any Questions?

V. P. Sharma

Documents

Presentation LOP