CALCULATION OF BI (FLOP) LOSS

Steps for computation of BI Loss
1) Find out the interruption period for which the Insurers are liable to pay the loss.
2) Find Estimated TO which Insured would have produced had the loss not taken place.
3) To find out this, you will have to apply trends, Adjustment & Other circumstances clause on STO to arrive at the most reasonable figure.
4) Find the actual TO insured has generated during the IP. It can be nil also.
5) Find out Reduction in TO by subtracting Actual TO from Estimated TO
6) Apply ROGP on this RITO to derive Loss of GP during the IP
7) Add ICOW if incurred
8) Apply UI on ICOW if all standing charges are not insured.         
(Not applicable when GP is insured on Difference method basis)
9) Reduce saving in Standing charges if any, during the maximum IP
10) Apply Average clause i.e. Under-insurance as explained
11) Apply policy deductible as already explained for 7 or 14 days of Std GP as defined in policy

Loss computation Exercise – 1

Calculate BI loss based on following information

a)      Policy sum insured – Rs 100 crs with an IP of 18 months
b)     Policy period 1st April 17 to 31st March 18 (matching with FY)
c)      Date of loss 1st July 17 & Date of recovery of business 31st Oct 17
d)     TO during the period from 1st July 16 to 31st Oct 16 = 200 crs
e)     TO during the period from 1st July 16 to 30th June 17 = 900 crs
f)       TO during 1st April 16 to 31st March 17 = 650 crs
g)      Gross Profit earned during the period 1st April 16 to 31st March 17 = 60 crs
a)      Actual TO during the period from 1st July 17 to 31st Oct 17             =  40 crs
b)     Policy has a TE of 7 days of std GP

Solution 1

Interruption period = from 1st July 17 to 31st Oct 17                          i.e. 4 months
Annual TO                                                                                               = 900 crs
Fy TO ( 16-17)                                                                                        = 650 crs
TO growth = (900 – 650)/650 *100                                                        = 38% ( approx.)
Standard TO                                                                                            = 200 crs
Estimated TO during the interruption period = 200 * 138%                  = 276 crs
Actual TO during interruption period                                                     = 40 crs
Reduction in TO during the IP                                                                = 276 – 40 = 236 crs
ROGP                                                                                                      = 60 / 650 *100 = 9.2%
Loss of GP during IP        = RITO * ROGP = 236 * 9.2%                     = 21.70 crs
Check Adequacy of sum insured
Sum required to be insured = ATO*ROGP*IP = 900 *  9.2% * 1.5 = 124 crs
Policy sum insured                                                                                    = 100 crs
Payable loss                                     = 21.7 *100/124                               = 17.50 crs
Let us assume that Policy was issued with TE of 7 days of Std GP
Std GP for 7 days                             =  7 x  (Per day STO) x ROGP  
                                                          = 7 x 200 / 120 x 9.2%                    = 1.07 crs
Net Loss Payable                            = 17.50 – 1.07                                  = 16.43 crs

Loss Computation Exercise – 2

Compute the BI loss based on following information
a)      Policy sum insured – Rs 80 crs with an IP of 15 months
b)     Policy period 1st April 17 to 31st March 18 (matching with FY)
c)      DOL - 15th Sept. 17 & Date of recovery - 14th June 18 i.e. 9 months)
d)     STO = 250 crs (TO during 15th Sept 16 to 14th June 17)
e)     ATO = 1200 crs (TO during 15th Sept 16 to 14th Sept. 17)
f)       Fy TO (16 -17)                                                                = 1000 crs
g)      Actual TO generated during IP                                   = Rs 25 crs
h)     ICOW incurred for mitigating RITO                          = Rs 50 lacs
i)       Loss of TO avoided by incurring ICOW                    = Rs 8 crs
j)       GP earned during previous FY 16 -17                        = 60 crs
k)      ROGP                                                  = 60 / 1000        = 6%
l)       Loss of GP thereby avoided = 8 crs x 6%                   = 48 lacs
m)    Saving in Standing charges                                         = 75 lacs
n)     Time excess                                                                    = 14 days of Std GP

Solution:

Growth trend = (ATO – Fy TO) /Fy TO = (1200 – 1000)/1000          = 20%
Adjusted Estimated TO during IP = STO x trend = 250 x 20%       = 300 crs
Actual TO            ( during IP of 9 months)                                          = 25 crs
RITO                                                                           = 300 – 25           = 275 crs
ROGP                                                                         = 60 / 1000          = 6%     
Loss of GP           = RITO x ROGP                          = 275 x 6%         = 16.50 crs
Add ICOW subject to MAX. of Loss of GP avoided                          = 0.48 crs
Less savings in Std charges                                                                   = 0.75 crs
Net Loss of GP   ( 16.50 + 0.48 – 0.75)                                                  = 16.23 crs
Sum Required to be insured= ATO x RIGP x IP= 1200 x 6% x 1.25     = 90 crs
UI factor  = Sum Insured / Sum Required to be insured                        = 80/ 90    
Loss after UI = 16.23 x 80/90                                                                     = 14.43 crs
Less Time excess  14 days             = TE x (per day STO) x ROGP                                                  `                                                 = 14 x 250 / 270 x 6%                        = 0.77 crs
Final assessed loss                         = 14.43 – 0.77                                      = 13.66 crs




Comments

  1. MohanJuly 26, 2020 at 9:39 AM

    Sir, in computation of Actual SI you mentioned IP as 1.5. Sir how it got arrived, just confused. Rest everything understood very well. We really indebted to you a lot.

    ReplyDelete
    Replies
    1. V.P SharmaJuly 28, 2020 at 7:31 PM

      Since Indemnity period is taken as 18 months in he example, therefore in calculations IP is taken as 1.5 years.

      Delete
  2. UnknownAugust 2, 2020 at 7:41 PM

    Sir
    Thanks
    This was like back to induction days👍

    ReplyDelete
  3. aSeptember 24, 2022 at 1:26 AM

    Sir if indemnity period is taken only for 6 months then the SUM INSURED can be given only 6 months or an annual turnover has to be taken

    ReplyDelete

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