Business Interruption (BI) insurance is intended to serve a financial lifeline when operations are disrupted by an insured event. Yet, many South African businesses only realise too late that their cover is insufficient, resulting in settlements that fall short of actual losses, often crippling a company’s recovery.
Author: Jolene Visser CA(SA)
At the Saica July 2025 Tech Talk series, I addressed the widespread issue of underinsurance in BI policies. Actual claim data and case studies highlight two core drivers of underinsurance: incorrect declared values and limited indemnity periods. This article expands on that presentation, offering insights for accountants, CFOs, and business owners looking to better understand and mitigate this critical risk.
Underinsurance in context: Why it matters now, not then
The South African business landscape is no stranger to operational disruptions. From the 2021 civil unrest to the KwaZulu-Natal floods in 2022 and persistent load shedding, the risk of temporary closures have become an inevitable risk.
According to The Chartered Institute of Loss Adjusters, 43% of BI claims reviewed are underinsured by an average of 53%. In simple terms, businesses are often insured for only half their actual losses.
Coverage gaps often surface during claim settlement, when the business’s financial health is already compromised. While much can be done at policy renewal to prevent underinsurance, key opportunities are frequently missed due to:
- Oversensitivity towards premiums;
- High level, rather than detailed, discussions with brokers about coverage;
- Failure to anticipate or provide for future growth upfront;
- Complacency; and
- Uncertainty about which costs to declare as insured or uninsured.
This article focuses on the two most significant drivers: incorrect declared values and limited indemnity periods.
Drive one: Incorrect declared values
The declared value is the foundation of a BI policy and, unfortunately, the only number the insured reviews before closing the file of the annual renewal process. If this figure is incorrect, claims are subject to adjustment under the condition of Average. Yet, businesses often declare values that do not reflect their actual exposure, leaving coverage far below what is required.
For example, if a business declares gross profit of R5m but generates R15m under normal conditions, the true Value at Risk (VAR) is R15m. Since only R5m was declared, coverage is only 33.3% (R5m ÷ R15m). Why? Because South African policies typically include the Average condition: if the declared value is only 33.3% of the VAR, then only 33.3% of the loss will be paid (even for partial losses), which devastates cash flow.
In a R10m BI claim, the Average clause would therefore reduce the payout to R3.33m (R10m x 33.3%), and that is before applying any deductible or excess. By the time a claim is submitted, it is too late to rectify underinsurance – a harsh lesson many business owners learn too late.
The common pitfalls resulting in incorrect declared values include:
- Accounting profit vs insurance gross profit: Declared values should reflect the gross profit as defined in the policy (typically turnover less uninsured working expenses), not accounting profits.
- Failure to factor in growth or expansion: Declared values are often based on outdated and historic financials, ignoring upward revenue trends, increasing costs, increasing or diversification of product lines, or pricing changes.
- Overlooking seasonality or new product launches: These fluctuations materially affect potential losses if an incident occurs at peak trading time.
The CFO, financial manager and/or risk manager play a critical role in ensuring that declared values are accurate. A thorough review of financial forecasts, production cycles, potential growth, and supply chain dependencies should feed into the declared value – not just last year’s income statement.
Driver two: Limeted indemnity periods
Even when declared values are accurate, a second threat looms large: the indemnity period. This period defines the maximum length of time the policy will cover losses after an insured event. In South Africa, businesses often choose short indemnity periods – commonly 6 or 12 months – without considering realistic recovery timelines.
Recovery is rarely predictable. Several factors extending timelines may include:
- Delays in rebuilding due to municipal approvals, supply shortages, or skilled contractor availability;
- Long lead times for importing machinery, restoring production, or replacing critical systems;
- Loss of key clients or contracts due to the interruption; and
- Regulatory or environmental approvals before recommencing trade.
Full recovery, especially in manufacturing or logistics-heavy businesses, may take 18 to 24 months. Once the indemnity period ends, the financial support from your insurer stops, even if the business is still facing operational or financial constraints, which can result in a damaging coverage gap.
Every business should assess the time restraints in relation to:
- Rebuilding physical assets and replacing stock or equipment;
- Regaining customer base and supply chain integrity; and
- Lead times for systems and process reimplementation (including data recovery and re-certifications).
Only after these factors are considered should an indemnity period be selected, with 18 to 24 months being a prudent default for complex businesses.
How do we manage this?
As chartered accountants, CFOs, and financial or risk managers, we are not just custodians of balance sheets but fiduciaries of enterprise value. It is therefore incumbent upon us to interrogate our clients’ or businesses’ insurance arrangements with the same rigour applied to audits or strategic forecasting.
Key steps include:
- Review schedules: Work with your insurance broker to ensure declared values align with policy-defined gross profit and current management accounts.
- Challenge short indemnity periods: Confirm they truly reflect your business’ recovery timeline.
- Conduct annual insurance audits: Especially after periods of growth, restructuring, or operational change.
- Collaborate with knowledgeable brokers: They should understand your industry, risk appetite and financial model.
- Understand your policy: Coverage is only effective if it’s clearly understood.
I often hear 'insurers will do anything not to pay'. This is untrue. A policy is a binding contract between the insurer and the insured. When the workings of that policy are not fully understood, it is unfair to blame the insurer when a claim arises and things don’t go as expected.
Insured businesses should understand it is not all doom and gloom. BI policies contain ample support to restore operations, such as 'Increased Cost of Working', which covers expenses incurred to prevent or mitigate a loss of sales post-loss. Though subject to certain conditions, this cover can be the difference between recovery and closure – and it is only useful if you understand your policy.
In conclusion
Business Interruption underinsurance is not just an insurance issue – it is a financial resilience issue. Incorrectly declared values and underestimated indemnity periods can cripple recovery, regardless of diligent planning in other areas.
In a South Africa where systemic risks are high and external shocks frequent, getting these elements right is essential. Let us treat insurance not as a grudge purchase but as an integral part of our financial strategy. Because the true cost of underinsurance is paid not in premiums, but in livelihoods, reputations, and long-term viability.
