We are all aware of the reaction from the insurance industry to the recent Christchurch Earthquakes, in that the premium cost for natural disaster insurance is on the rise. This will already be apparent to some businesses that have recently renewed their material damage (buildings & contents) and business interruption (loss of profit) insurance, and to others as they do so from now on.

As with any other claims for property damage, claims for natural disaster damage are subject to an excess that the business has to pay. What has not received so much attention as the premium increases, but also has the potential for a significant impact on business, is the cost in terms of the excess to be applied to future natural disaster claims.

Whereas for claims from fire and other incidents, the excess is expressed as a fixed amount, for natural disaster claims the excess has up to now been expressed as a percentage of the damage incurred. Businesses in future will be faced with a natural disaster damage excess expressed as a percentage of the sums insured under the material damage policy, at any one location.

The difference in the excess structure will have implications to all in the event of natural disaster damage. The minimum excess will increase from 2.5% or 5% of the damage (depending on the location and the insurer) to 5% of the sums insured at any one location subject to a minimum of $5,000, but reducing to 2.5% minimum $2,500 for Auckland and Northland. For businesses located in buildings pre 1935, the excess will be likely higher still.

Using the following example of a Nelson based business with a combined sum insured of $5,000,000 for buildings, plant and stock, faced with natural disaster damage of $2,000,000, the implications of the change can be best explained:

Damage $2,000,000 X 2.5% = excess $50,000. Insurer pays $1,950,000. Uninsured cost $50,000.

Now becomes

Sum insured $5,000,000 X 5% = excess $250,000, insurer pays $1,750,000. Uninsured cost $250,000.

It is also important to note that the excess is now applied to the aggregate of the claims under both the material damage and business interruption policies.

For businesses with higher values the implications are far more serious, in that the excess as a percentage of the sums insured is even higher. Businesses can calculate their uninsured portion of any future natural disaster damage claims using their material damage sums insured.

Future claims may present cash flow funding issues as businesses will now be faced with a higher excess (uninsured cost) than before. As with any disaster this issue would need to be addressed at a time when getting back to normal is a priority, but turnover and cash flow is likely to be effected by this.

Ensure you speak with your WHK adviser about the possible ways your business can plan now for the future funding of unplanned and unexpected costs, arising from natural disasters.

Article has been compiled in association with Tony Rowe, Broking Director - FMR Risk