We all know that having good business insurance in place is important. It ensures our businesses survive after a disaster. It may also allow us to increase productivity and even thrive.
Like many business owners you may think that you are fully covered after a natural disaster. Your material damage policy covers the assets of your business, while your business interruption policy covers any loss of income. With these types of covers in place you would think this was almost a guarantee that your business would bounce-back after a disaster.
This might not be enough.
Research after the Canterbury Earthquakes sheds some light on the effectiveness of business insurances. It suggests that businesses that received prompt and full payment of their claims enjoyed better recovery than those that had protracted or inadequate claim payments. But for businesses that had insurance and had delays in their claim payments the research suggests that these businesses did worse than those businesses with no insurance at all. That is food for thought!
This analysis highlights the importance of both adequate insurance coverage and also an insurance policy that delivers prompt claim payments. It is the speed of payment that can make the difference between business failure, survival and success when it comes to bouncing back from a disaster.
Firstly, earthquake events are complex systems. Not only is there massive destruction of property but often there is significant damage to land. We saw this in Christchurch with soil liquefaction and slope instabilities. To further complicate matters, large quakes are often followed by many smaller (or not so small) aftershocks that exacerbate damage, keep everyone on edge and complicate the claim management process.
The conditions embedded in insurance policy wordings can also create unexpected outcomes, headaches, and lengthy claim settlement periods for business owners. For example:
1. Business interruption (BI) policies are an important part of a business continuity strategy. The responsiveness of these policies is generally dependent on the business having a claim under their material damage policy. This works well in instances where there is property damage, but there may be situations, like we saw in Christchurch and Kaikoura, where there is no damage to the property and the business still experienced significant loss of income. If a council ordered your business closed because the neighbouring building was risky, or because of cordons, or because access routes or underlying infrastructure were damaged, your policy may not pay out.
2. Indemnity periods can also have an impact on the effectiveness of your policy to support your business. Businesses often elect a shorter indemnity period, i.e. 12 months to improve the affordability of their policy. As demonstrated by the Canterbury earthquakes and the Kaikoura earthquake, the time that it can take to get your business back up and running could take 36 months or more after a disaster event. Again, you are up for the cost once your indemnity period has expired.
3. You may think that your BI policy is activated on day 1 after a disaster, but most BI policies include what’s called a “deferment period” which means that your policy does not immediately respond after a disaster. “Deferment periods” act like an “excess deductible”. Any loss of business in the first period after a disaster, i.e. 21 days, is incurred by the business owner and is not covered by the policy. For many owners this is another uninsured loss, it adversely impacts the continuity of your cashflow which is critical for survival, and it impedes your ability to take advantage of emerging opportunities through recovery.
4. Estimates of losses could also prove tricky with a BI claim. Often claim payment eligibility requires complex calculations to determine the reduction in your revenue and your entitlement. An example, again seen from the Christchurch earthquake, is that insurers argued that businesses had lost customers not because they were unable to trade, but because everyone stopped going into town. Many Christchurch businesses found their claim entitlement significantly reduced after the earthquakes due to a “de-population clause” in this policy wording.
Finally, it's worthwhile remembering that earthquake events don't discriminate, so often business owners have the double-whammy of recovering their business while at the same time supporting and helping their family recover. Business owners are likely to manage multiple complex insurance claims across their personal and business lives, compounding the anxiety and emotional stress.
Business owners should consider parametric insurance to support their business continuity strategy. Rather than requiring loss estimates after an event, which can be lengthy and contentious, parametric insurance simply pays out the agreed amount if the event happens. It’s a bit like a life insurance policy.
Parametric insurance products are exceptionally well suited to earthquake risk. If the earthquake happens, payment comes quickly. Bounce Insurance is the only provider of parametric earthquake insurance in New Zealand. Bounce policies are based on the seismic shaking (using independent and trusted GeoNet strong motion sensors) in your neighbourhood with an upfront payment made within 5 days of a large earthquake to boost your cashflow position. At present, business owners can purchase policies providing coverage up to $50,000.
Parametric earthquake insurance takes the complexity out of the system and provides confidence and certainty that costs that businesses face in the early days after a large earthquake can be met. As illustrated after the Canterbury quakes it’s the speed of payment that matters for businesses to bounce-back and thrive after a disaster.
To learn more about parametric earthquake insurance please contact your insurance broker or contact us directly at www.bounceinsurance.co.nz.