Blog 59: Business Interruption by Xavier Lo, FIA, FRM, MBA

As we are still in covid [新冠肺炎] times, might as well write about something that has been brought into attention these few years. Business Interruption insurance [停業保] has always existed, but as you can imagine, a lot of companies have had their business interrupted during covid, so lets focus a bit here today.

What is Business Interruption insurance? In a nutshell, if a company is unable to carry out its normal business operations [商業運作] (easiest example is that it is unable to even open its shop for customers), then the insurance policy will compensate them for the amount of revenue [收入] that they expected to generate that day. It is widely accepted that for this policy to pay out, there must be some sort of physical damage [財產損壞] which directly affects the opening of the business. Lets say there was a fire in the shop, the result is that the shop needs to close down, and any lost potential revenue is paid by the insurance company.

Not surprisingly, a lot of companies had to shut down during the pandemic as a result of government orders [政府要求] (like restaurants). However, there wasn’t any physical damage involved. This is what we call a Non-Damage Business Interruption policy [無財損停業保] (also known as NDBI). The problem is that since the trigger points for an NDBI policy to pay out is not that clearly defined, nor can all situations be easily stated, the pandemic-caused shut downs lead to a lot of court cases between insurers and business owners. For example, should insurers pay for all shut downs no matter the reason? If so, then businesses have an incentive to just close their shop if they had a quiet day. How about receiving payment only if the government orders a shut down? How do you define a “government order” though?

As you can see, there are lots of nuances, and one blog post can’t even begin to cover all discussion points. Feel free to reach out to me if you want to find out more. Remember to stay safe everyone!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

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