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Home Insurance
- Can I own a home without domestic package insurance?
- Can I purchase domestic package insurance if I'm renting a house?
- How are claims paid under various Sections?
- How do I file a claim under domestic package insurance?
- How often should I review my policy?
- What information do I need to provide to my agent,broker or insurer when proposing or renewing cover?
- What is a standard domestic package insurance cover?
- What is domestic package insurance?
- What kind of domestic package cover is adequate?
- What should I do if I am leaving the house unoccupied for sometime?
- What type of insurance do I need for a house purchased through a mortgage?
- Which are the common types of misfortunes covered in a domestic package insurance?
- Why is it important to take a home inventory?
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Motor Insurance
- How do I file a motor insurance claim?
- How is the premium of motor insurance determined?
- Is motor insurance compulsory in Kenya?
- What are my rights when filing a claim?
- What are the different types of motor claims?
- What are the different types of motor insurance certificates in Kenya?
- What are the different types of motor insurance policies?
- What are the duties of insured person in the event of an accident?
- What are the duties of the insurance company in the event of a claim?
- What are the main documents required in settling a claim?
- What information is required when proposing for<br>insurance?
- What is motor Insurance?
- What should I do if I am involved in an accident?
- What should I do if I have a problem with claim<br>settlement?
- What steps are taken by an insurance company before a motor insurance claim is settled?
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Medical Insurance
- Am I insured while out of the country?
- Do I need to continue paying my monthly contribution to NHIF if I have medical insurance policy?
- Does medical insurance cover all hospital bills?
- Does my policy cover conditions existing before I took up the insurance?
- Does the policy cover all my children?
- Does the policy cover the insured in old age?
- How are medical bills paid?
- How do I apply for medical insurance?
- How do I benefit from NHIF membership?
- How will the hospital know that I am the insured?
- What happens in case of an emergency?
- What is medical insurance?
- Who does an in-patient policy cover?
- Who does an out-patient policy cover?
- Will the policy compensate me for all kinds of treatment that I receive?
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Agriculture Insurance
- Agriculture insurance underwriting and claims
- Challenges of crop insurance
- Index Based Livestock Insurance
- Index based weather insurance
- Introduction to agriculture insurance
- Livestock Insurance
- Other types of agriculture insurance
- Perils that affect the agriculture sector
- Poultry Insurance
- The International Agricultural Insurance Market
- Types of Crop Insurance
- What is Agriculture insurance?
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Aviation Insurance
- Aircraft Hull and Liability Cover
- Aviation Hull War and Allied Perils Cover
- Aviation Insurance Underwriting and Rating
- Introduction to Aviation insurance
- Laws Relating to International Trade or Carriage of Passengers by Air
- Loss Adjusting and Surveying Aviation Insurance
- The Aviation Insurance Market
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Business Interruption Insurance
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Common Factors in Property Insurance
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Emerging Issues and trends in general insurance
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Engineering Insurance
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Fire and Perils Insurance
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Liability Insurance
- Classes of liability insurance
- Directors’ and Officer’s Liability Insurance
- Employers Liability Insurance
- Introduction to liability insurance
- Legal Expense Liability Insurance
- Products LIability Insurance
- Professional Indemnity Insurance
- Public Liability Insurance
- Trustees’ Liability Insurance
- Work Injury Benefit Act (WIBA)
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Marine Insurance
- Arranging for marine insurance
- Effecting Marine Insurance market
- International Contracts of Sale(INCOTERMS)
- Introduction to Marine Insurance
- Marine Insurance and Trade
- Marine Insurance Claims
- Marine Insurance Policies
- Marine Insurance Underwriting and Rating
- Marine Perils
- Principles of Marine Insurance
- The marine Insurance Markets
Advance Profits Business Interruption Insurance
This cover is available where a new business is contemplated or a major extension to an existing business is to be made by either their building work or the introduction of new equipment or machinery. Were either of the losses to happen, a financial a financial loss may occur through delay by:
- Damage to the work being undertaken.
- Delay in the finalization of the works as a result of a peril.
- Damage at the premises of a supplier of some key units of plant or equipment.
- Damage to such machinery or equipment while in transit.
The protection of the loss resulting from such interruption is called advance profits insurance. The indemnity period will start on the date when, but for the damage, the new business would have commenced operations in the new premises or with the new machinery or equipment. the contingencies involved may be fire and allied perils, accidental damage, to plant in transit, installation, testing and even marine risks. This type of cover is granted where there is reasonable certainty that the actual date upon which work should have commenced, had the damage not occurred, can be accurately determined. The contract date should allow for the possibility of delays or hold up in supplies not caused by the insured perils.
Underwriting Considerations.
The following facts will be taken into account in underwriting this class of business.
- The degree of hazard posed by the perils which are the subject of insurance concerned.
- The exposure of insured business to interruption or interference by the spread of the premises, e.g. there may be three or four separate factories but they do operate independently.
- Dependence of the business on a particular part of the premises, e.g. the business may be a number of retail shops with a factory or warehouse. If fire occurs in the factory, this would seriously affect the business by interrupting supplies to the shops.
- Where the business is a seasonal one, for example, a fire at beach hotel in the coast at the beginning of peak season would have a serious effect upon the turnover than at any time.
- The length of indemnity period- the claim potential increases in proportion to the duration of the indemnity period.
- Specialized manufacture which may aggravate the delay in resumption of normal production, because of special machinery, goods or raw material being difficult to replace or in short supply.
- The aspect of competition and the ability of business to recover lost customers after damage to its premises.
The underwriter will most likely call for an interruption report to supplement the fire surveyors report. This will inter alia show the details of the comparative profitability of different premises to be included in the cover and the extent to which each can operate independently or is independent wholly or partly on the activities at other premises.
The effect of certain features may call for different judgement from the material damage and business interruption loss aspects. Thus a building of light or non- standard construction, while presenting a higher fire hazard, may indicate speedy and easy replacement, so that only a short period of interruption is likely following damage, whereas a high standard of construction, while minimizing the fire hazard, may indicate that if damage occurs, the production will be held up for a long time while a similar building is erected.
The Basis of Rating
The rate charged for business interruption insurance depends on:
- The physical risk of the insured premises
- The indemnity period chosen
- The interruption risk
Business interruption rates have a starting point called the basis rate which is usually average rate applied to the material damage on contents. Contents are the ones concerned with operation and therefore have a greater impact on interruption risk. To the basic rate, a percentage loading is then applied which caters for the interruption risk. The percentage is taken from a well-recognized standard scale of loading to produce a profit rate linked to the length of maximum indemnity period.
Common examples of indemnity periods chosen and percentages applicable are as follows,
Policy Period Percentage of premium
3-month indemnity period 50 percent of annual premium
6 75
9 90
12 100
15 95 of the full period premium
18 90
21 80
24 75
36 65
In few special cases, it is considered that the average fire rate on a building will give a more accurate indication on the interruption risk than the average rate on contents and in such cases it is the sums insured on buildings which are taken into account in the calculation of the basic rate.
An abnormally high or low interruption risk might influence an underwriter in deciding to vary the percentages shown above. For example, when underwriting a general ware house, situated in a modern brick and steel building on the outskirts of a large town with a high unemployment and plenty of vacant warehouse space, one will have to take into account the following,
- Alternative building is readily available
- There is no specialized machinery required
- Labour is available in plenty
- Replacement of stock is likely to be freely available
Losses which are not Covered
Examples of consequential losses which are not covered include:
- Under- insurance against material damage
- Difference between the value of stock or plant at the time it suffered insured damage and its value at the time of its subsequent replacement.
- Deterioration of undamaged stock after damage has occurred to the premises by the fire or other insured peril. E.g. foodstuff may deteriorate in store and become unsalable, or goods may go out of fashion.
- Fines, damages and/or penalties under contracts arising from breach of contract in consequence of damage.
- Loss of goodwill
- Failure to recover debts owing to destruction of accounting and business records
- Claims from third parties
Measuring the Loss
While it is not difficult to calculate the gross profit it earns after the effects of the damage have ceased. There are also some difficulties in calculating the gross profit which would have been earned had damage not occurred. The policy specification lays down the formula under which the trading loss will be assessed.
In the specific terms of the policy, the amount to be paid will be:
The sum produced by applying a rate of gross profit to the reduction in turnover; adding any increase in cost of working spend to minimize the loss of gross profit.
There will be additional expenses which may be found in items such as overtime to staff, rent and rent of temporary premises, advertising etc. the insurers liability is based upon the additional expenditure, not exceeding the amount produced by applying the rate of gross profit to the amount of the reduction that has been avoided by the expenditure. This restriction is inserted in the policy to prevent the insurers being called upon to pay unreasonable costs. In other words, insurers will not spend more than a shilling to save a shilling. The above results will be adjusted for:
- The trend of the business.
- Any saving such as rent, or rates which cease to be payable during the indemnity period
- Adjustment for under-insurance (where average is applicable)
Claim Payment
For there to be a valid claim in a Business Interruption Policy, the following conditions must be met. There must be damage;
- Damage caused by an insured peril
- To the property used by insured
- At the premises where cover has been extended to other premises, for the purpose of the business. Resulting in interruption of the business.
Once the conditions are satisfied, the formula set out in the specifications is used to calculate the loss. the following are the steps set out in the formula to arrive at the amount paid.
- Establish the duration of the indemnity period
- Calculate the rate of gross period (or revenue, gross fee etc.)
- Calculate the reduction in turnover;
- Establish loss of profit (i.e. the reduction in turn over multiplied by the rate of gross profit)
- Calculate the increase in cost of working
- Identify any saving in expenses
- Check the adequacy of the sum insured
The following illustration shows how these steps are used to calculate a loss based on the gross profit type of cover.
Step 1. Establish the indemnity period
Let’s assume the indemnity period was 5 March 2010 to 23 April 2010, i.e. Seven Weeks
Step 2. Calculate the rate of gross profit
This is worked out by getting the gross profit earned in the last financial year divided by the turnover (sales) for the same period and expressed as a percentage. we shall assume that the Gross Profit in the last financial year was KES 55,000,000 and the turnover was KES 100,000,000. Therefore, the rate of gross profit is KES 55,000,000 divided by KES 100,000,000 X 100% = 55%
Step 3. Calculate the reduction in turnover
The reduction in turnover is:
The standard turnover, i.e. the turnover during the preceding the period in the preceding twelve months which corresponds with the indemnity period (05/03/2009 – 23/04/2009.
- Let us assume this was KES 10,000,000 while the actual turnover during the period of disruption was KES 8,000,000
- It follows a reduction in turnover was KES 2,000,000
Step 4. Establish loss of gross profit.
Reduction in turnover (KES 2,000,000) x rate of gross profit (55%) = Loss of gross profit.
Hence loss of gross profit was KES 2,000,000 multiplied by 55% is KES 1,100,000.
Step 5. Identify the increase in cost of working
These are the extra costs such as overtime payments and rent of temporary premises, incurred to try and reduce the impact of the interruption on the business. The amounts have to be within the economic limits. In simple terms, this mean the insurer will not be prepared to pay more than one shilling to save a shilling. example, we assume that the insured has spent KES 400,000 on increased cost of working. If the insured had not spend this amount, the reduction in turnover would have been KES 3,000,000 instead of KES 2,000,000
To check whether this makes sense, we apply the rate of gross profit to the reduction in turnover avoided. i.e. 55% x KES 1,000,000 = to Ksh 550,000
So, by spending an amount of KES 400,000 to prevent a loss of KES 550,000 in gross in gross profits, makes sound economic sense.
Step 6. Identify any Savings in the Business Expenses;
Savings may arise from any number of charges e.g. heating, lighting, packing, etc. which reduced during the indemnity period.
Let us assume a saving of KES 300,000
Step 4.
Loss of gross digit KES 1,100,000
Increase in cost of working KES 400,000
TOTAL KES 1,500,000
Less
Step 6:
Less savings KES 300,000
Total loss KES 1,200,000
Step 7:
Test for adequacy of the sum insured.
The factors needed to establish what the sum insured should have been are:
Rate of gross profit (55%) applied to;
The turnover for the twelve months immediately prior to the loss. (i.e., before 05/03/09) which was KES 11,000,000
The condition of average states that in the event of underinsurance, the policy pays that proportion of the claim amount which the sum insured (KES 550,000) bears to the amount which should have been insured (KES 605,000)