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5 Things to Consider When Determining Business Income Insurance Limits

To accurately calculate a potential business income loss, the costs and added time are much different than they may have been just a few years ago.
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5 things to consider when determining business income insurance limits

Supply chain disruptions continue to make headlines, causing challenges for businesses and consumers alike. Add to this, inflation rates and staffing challenges, and manufacturers are potentially facing some steep business interruption risks that could put their businesses in the red without the right coverage in place. 

With these market conditions in mind, it is more important than ever for agents to take a close look at their manufacturing clients' coverages to help ensure they have adequate protection. 

Here is an example: A manufacturing facility experienced an electrical fire that resulted in a total loss at the location. During the rebuild and restoration, additional unanticipated expenses arose that the business had to absorb. This included assuming an unexpected $2 million per month to relocate, finding temporary warehousing and absorbing increased shipping costs. These additional expenses drove the business income loss over the limit on the policy. 

The good news for clients is that an appropriate business income limit and contingency plan can help offset these risks. Business income is commonly included in many property policies, but calculating the proper limit is often misunderstood. 

Relocation and warehousing expenses are just two of several items to consider when setting a limit for business income. This coverage can be complex and there are frequently overlooked risks that can leave manufacturers open to financial loss. 

To accurately calculate a potential business income loss, the costs and added time are much different than they may have been just a few years ago. In addition to traditional considerations such as payroll, employee benefits and insurance premiums, as well as identifying groups of employees that will work through a business interruption, agents should work with their manufacturing clients to take a close look at their increased business income exposures in this environment, keeping in mind the potential cascading effects of supply chain and logistic issues. 

Here are five key areas to consider when determining business income coverage: 

1) Cost and availability of materials, equipment and inventory. U.S. manufacturers are increasingly dependent on overseas suppliers for raw materials, goods and machinery to produce their products. This dependency, coupled with just-in-time manufacturing where there is not much excess on hand, creates increased risk, especially with recent supply chain disruptions and material shortages. In addition, if a piece of machinery needs to be repaired or replaced, there are often extended wait and turnaround times, adding substantial costs for businesses. 

For example, automotive, machinery and electronic components have experienced shortages, so for products that require these parts, delays can be more substantial if the supplier also relies on a third party to provide goods. This can create a blind spot for manufacturers but having a holistic perspective of overseas dependencies and potential increased times and costs to obtain materials or equipment can help accurately evaluate business income coverage. 

2) Leveraging new automation. More and more manufacturers are turning to automation to keep up with demand and help ease labor market challenges. Machine vision solutions are being used to help perform tasks from basic picking and sorting to enhanced quality assurance; implementation of robotics helps to eliminate manual tasks, such as transporting items and loading and unloading within a facility; and end-to-end automation leverages CNC machines that can complete finished products in a single operation while doubling efficiency, reducing manufacturing time by up to half in some cases. 

The influx of automation raises another consideration in business income coverage—these technologies can be more expensive to repair and replace. It is expected this trend will only expand, so this is an important consideration if leveraging these technologies. 

3) Building restoration. Supply chain disruption has further implications when a manufacturing facility requires repair, rebuild or restoration. Manufacturers oftentimes may not realize their coverage is inadequate in this area until it is too late. 

Clients may face increased costs of materials, longer wait times to acquire the materials and potential delays to have the work completed. Further, if a manufacturer is shut down for an extended period and is unable to meet customer demands, there is the longer-term risk of customers going elsewhere. Restoration that may have taken six months in the past can now take well over a year and can affect the future of the business. 

4) Temporary relocation of a production facility and interdependent locations. Manufacturers' business continuity plans often rely on a temporary location to continue production. With many facilities running production shifts around the clock, there may be limited time available to use another manufacturer's facilities to mitigate the loss.

In addition, agents need to understand the interdependency of insured locations. For example, if there are multiple locations that are interdependent upon each other, an issue at one of the upstream locations could result in a significant negative downstream impact on a company's total production.

5) Supply chain resiliency. Some manufacturers have higher levels of production and income or sales during peak seasons, while others may have key suppliers or customers that account for a majority of their sales volumes. A loss during a peak season, whether within the manufacturer's operation or up or downstream in the supply chain, can be difficult to overcome. The loss of income can be difficult to make up at a later date and key contracts may be lost during the downtime. 

A resilient supply chain considers the underlying vulnerabilities in the chain that can make it fragile. Common supply chain vulnerabilities include product complexity and supplier networks, transportation and financial resiliency. Businesses need to consider the level of susceptibility to unforeseen events and look for ways to reduce their impact, offsetting that with the appropriate business income coverage.

Independent agents are well-positioned to serve as valued advisers to their manufacturing clients as they look to navigate this complex market. In wake of recent supply chain disruptions and inflation, agents can help educate manufacturing clients on the increased risks related to business income by calling attention to the potential downstream impacts if they were to face a business interruption event today.

Similarly, preparation is key. Current and comprehensive business continuity plans are a manufacturer's first line of defense when faced with an interruption. Partnerships with carriers that offer resources to support businesses in the development of these plans is an important value-add in insurance risk management offerings. Agents can also encourage clients to consider backup supply chains to help mitigate risks. 

Beyond this, agents can work with their manufacturing clients to review their current business income protection and limits to ensure these five areas are properly addressed with adequate coverage and limits, designed to meet the evolving risks of today's manufacturers. 

Matthew Mitchell is president, middle market at The Hanover Insurance Group, Inc.


16606
Friday, June 24, 2022
Commercial Lines