By Jolene Visser CA (SA), Managing Director, Forensure.
How Standard Turnover and Savings Shape Business Interruption Outcomes
Business Interruption (BI) insurance is one of the most technical and misunderstood areas of insurance. At its core lies a structured financial model, often referred to as the BI formula, which aims to quantify loss in a consistent and policy-aligned manner. When I am asked to present BI concepts, such as in a recent session with Partner Risk Solutions, my starting point is always the same: orienting the discussion within the BI formula.
In this piece, we focus specifically on two key components – standard turnover and savings – and their role in shaping the overall BI outcome. Let us first look at where in the BI formula (or BI calculation process) these components fit. The circled elements are where we will dive into:
Standard Turnover: Establishing a “But-For” Benchmark
Turnover forms the backbone of almost every BI assessment. In practical terms, if turnover has not been affected, there may be no BI claim (though there are exceptions; for example, if costs went up to prevent a loss of turnover, that might still qualify for a BI claim).
Standard turnover reflects what the business would have achieved but for the loss event. It is generally defined in policies along the following lines: “…the turnover for the 12 months immediately prior to the Date of Loss that corresponds with the indemnity period.”
However, BI policies recognise that the past is not always a reliable predictor of the future. This is why the Special Circumstances clause exists: it allows for reasonable and justifiable adjustments to historical turnover.
Determining these adjustments introduces complexity, because numerous factors may influence a fair benchmark. Examples include:
- Historical revenue growth patterns, positive or negative, and their sustainability.
- Industry performance, location-specific influences, and overall economic conditions.
- Shifts in market dynamics or consumer behaviour.
- Supplier dependencies, staffing challenges, or disruptions in the supply chain.
- New opportunities or constraints arising around the time of the loss.
The goal is not to replicate history, but to create a realistic performance simulation of the business had the loss not occurred. Misjudging trends, whether upwards or downwards, can materially distort the indemnity.
Savings: A Very Misunderstood Element of BI Claims
Savings are accounted for after the loss of gross profit is calculated. In simple terms:
If the insured is fully indemnified for lost gross profit, but certain overheads are no longer incurred because of the interruption, failing to deduct those savings would result in over-indemnification.
This often leads to confusion and frustration from insured parties who ask, “How could my business have saved money when it burned down?” This misunderstanding is common and rarely explained clearly.
Savings are complex because every business is unique – its “DNA” shaped by its structure, operations, history, and context. A standardised approach seldom works.
The methodology mirrors the standard turnover process:
- Determine what expenses the business would reasonably have incurred during the indemnity period.
- Compare this with what was actually incurred.
- Any reduction, if directly caused by the interruption, constitutes a saving.
Two important principles guide this process:
- Identify only expenses that were genuinely affected by the loss event.
A cost may increase or decrease, but what matters is whether the loss event caused the change.
- Adjust historical expenses to current-period values.
Inflation may not always be the correct adjustment factor. Some expenses escalate differently, contractually, seasonally, or operationally.
Let’s look at two examples to distinguish a valid saving from an invalid one.
Example 1: Payroll Adjustments
Valid saving: Staff retrenchments caused by the insured event (e.g., COVID-19 layoffs). The difference between expected payroll and actual reduced payroll constitutes a saving.
Not a saving: A staff member who resigned before the loss event. Their departure is unrelated, so the variance is not claim-related.
Example 2: Rental Adjustments
Valid saving: Exercising a break clause and stopping rental payments due to the interruption. Reduced or halted rent is a saving.
Not a saving: Moving to cheaper premises during the indemnity period. This is a business decision, not a cost reduction caused by the loss event.
Conclusion
Standard turnover (and the underlying turnover trends) and savings are two of the most sensitive and debated components in BI calculations. Both require a clear understanding of the business, careful analysis of historical data, and thoughtful application of policy mechanisms. A BI claim is not merely a mathematical exercise; it requires a structured simulation of what the business reasonably would have looked like but for the interruption.
Disclaimer
This article is for informational purposes only. It reflects the personal views of the author and does not constitute professional advice. The content is consumed at the reader’s own risk; the author shall not be held liable for readers who discover a new, fascinating world in BI that distracts them from their day-to-day responsibilities.
About the Author
Jolene Visser is a Chartered Accountant, forensic accountant, and loss adjuster with specialised expertise in loss quantification, assessment, and financial analysis within the insurance industry. She is the founder of Forensure, a firm dedicated to forensic accounting and related investigative services. Jolene is a Licentiate member of the Institute of Loss Adjusters of Southern Africa and an Associate member of the Insurance Institute of South Africa, reflecting her commitment to professional excellence and industry integrity.