IRDAI License Number: IRDAI/INT/ISNP/2022/250
Have you ever marvelled at the deft movement of a puppeteer's fingers that create a real life like scenario before you. For a moment let us move away from the obvious excellence of skills of the puppeteer and look at the environment around him, which make his show a success. What if heavy rains keep away the audience ;what if major electrical grid breakdown prevents the show from being held and so on and so forth.
Switching back to the world of business, it is apparent that a lot of factors or dependencies, both internal and external control the successful running of an enterprise. Let us explore some of these from the perspective of profit making commercial manufacturing facility. Reliable supply of raw material/ components, a well laid out manufacturing facility, efficient and dedicated workforce and dealerships across the country for selling the product are some of the internal and external factors contributing to the profitability of the enterprise.
Of course, suitable insurance policy to take care of any unforeseen contingency helps in maintaining the balance. A Business interruption (BI)/ loss of profit (LOP) protects the balance sheet of a company. But it is to be noted that a standard BI/LOP insurance cover has the precondition of a payable material damage loss at the insured premises. For the impact of factors beyond the insured premises, Insurers offer Contingent Business Interruption (CBI)/ No material damage (NMD) alternatives. Let us try to understand this variation of a BI cover & also look at the various internal & external dependencies of profitability of a business.
Extension of BI cover for Suppliers & Customers, Public Utilities & Denial of access are some of the external dependencies provided for by the Insurers. Let us try to understand the internal Interdependencies in some detail.
A sample wording for this is:
“Where the insurance provided by Section 2 - Business Interruption of this Policy insures Gross Profit, such insurance shall also apply in the event of interruption of or interference with the Business carried on by the Insured in consequence of loss or destruction of or damage to property at any other premises owned, leased or occupied by the Insured or any company standing in the relationship of subsidiary to parent to the Insured or subsidiary to parent to any company who are themselves a subsidiary of the Insured for the purpose of the Business (i.e. those not stated as Premises in the Schedule) and such loss, destruction or damage shall be deemed to be Damage at the Premises”
Dependence of a company upon other companies within the same group creates interdependencies. If insured separately, then each company has to have a Suppliers and Customers extension to take care of this dependence. A better way is to insure the interdependency risks as a group solution, which covers the business interruption loss of the whole group.
The vertical integration of group companies makes risk management challenging and increases the demands placed on insurers regarding correct risk assessment and loss evaluation. A major factor in event of claim, is of determining transfer pricing of output of one unit as input of another. The value additions at each stage of dependence , probably determined at the Group Corporate level make the task of finalizing the correct sum insured a challenging one both for the Insured & Insurers.
