LBIA Business Interruption – do wordings respond to current business practice? 2007 Reference: LBIA 2007 1.

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Business Interruption – do Business Interruption – do wordings respond to current wordings respond to current

business practice?business practice?20072007

Reference: LBIA 20071

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Modern business v current Modern business v current wordingswordings

Agenda for today

Consider how standard BI policies respond to modern business practices

How would new policies be underwritten?

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PresentersPresenters

Wordings – Diane Jenkins, Technical Director, Europe, Aon Mergers and Acquisitions Group.

Underwriting information – Steve Manville, AIG Vice President, Property Division, UK & Ireland

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WordingsWordings

Contract certainty

Do current wordings respond

What about head office activities that do not generate revenue

Should we still be relying on Blundell Spence?

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Blundell Spence agreementBlundell Spence agreement Letter of intent issued by insurers Agreed that reasonable increased costs of working would

be paid following loss of factory or head offices

BUT Originally designed to apply to manufacturing risks Applies to own premises/activities No formal agreement – market practice How often do brokers request letter of intent? Extent of cover implied – would insurers pay where the

office functions are outsourced?

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Example - OutsourcingExample - Outsourcing

Example of Outsourcing Many outsourced activities do not generate

revenue – no effect on turnover Need to consider special cover for non-revenue

generating activities Use amended AICOW? Consider an R&D type wording? Consider how a standard wording responds even

where revenue is affected by outsourced activity

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DefinitionsDefinitionsPremises Different definitions appear in different policies

but an example is:

  The word “Premises” shall mean any premises owned, leased, occupied or utilised by the Insured within the Territorial Limit"

This is a wide definition and many policies will have narrower definitions

Not sufficient to include outsourcer’s premises

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Definition of PremisesDefinition of Premises

Any Premises, owned, occupied, utilised or used by the Insured or any contracted outsourcers of the insured within the Territorial Limit

Very wide definition Will cover all premises owned, occupied, utilised

or used by outsourcer Insurers may not be happy to give such wide

cover!

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DefinitionsDefinitions

Territorial Limit: The definition of premises refers to the territorial

limit so needs to be right

May need to be worldwide depending where the outsourcers have premises

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DefinitionsDefinitions

The result of changing all the definitions is:

A VERY WIDE POLICY

A happy client!

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Suppliers ExtensionSuppliers ExtensionTreat outsourcers as suppliers – specify limits Extends definition of Premises and Incident But some types of suppliers excluded e.g

telecomms All the premises of the outsourcer need to be

added Assess accumulation issues Clarity of cover Option to choose the correct sub limit Changes during the period of insurance

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Other IssuesOther Issues Still need to check definitions of business, insured,

gross revenue, territorial limits Subject to all other terms conditions and provisions

of the policy. Warranties/conditions precedent Terrorism - Need to buy back worldwide cover if

territorial limits are worldwide Subrogation Utilities extension

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OutsourcingOutsourcingUnderwriting ChallengeUnderwriting Challenge

Steve Manville, Steve Manville, AIG Vice President, Property AIG Vice President, Property Division, UK & Ireland Division, UK & Ireland

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Can Insurers respond?Can Insurers respond?

Barriers

Solutions

Market Response

Summary

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BarriersBarriers

Appetite

Contract Certainty / ability to handle claims

Inability to understand the risk

Capacity

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SolutionsSolutions

Information

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Example RisksExample Risks

PD

BI

BI EML

Outsource

• PD / BI £12m

Risk B

£2m

£10m

£2m

£10m

Risk A

£10m

£2m

£2m

£250k

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SolutionsSolutions

Information

Wording

Appetite

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SummarySummary Barriers:

– Appetite– Contract Certainty / ability to handle claims– Inability to understand the risk– Capacity

Solutions– Information– Wording– Appetite

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Can Insurers respondCan Insurers respond

YES

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QuestionsQuestions