BUSINESS INTERRUPTION AND LOSS OF PROFIT

Business interruption is the reduction or complete interruption of production/service in your business.

Whatever the activity of your business, you face many risks that are not likely to occur. In case of the realization of these risks caused by fire, internal flooding, terrorism and similar events and natural disasters such as earthquakes, storms and landslides, you will face many losses and the profit purpose of your business will be interrupted.

Insurance is one of the most effective ways to protect the securities/real estate, machinery or goods you use in your business activities against these risks. However, standard insurance policies only cover material damages, do not give you the opportunity to replace your declining and lost values. Imagine that one of the risks enumerated has come true. It may be possible for the production or service to be completely or partially stopped for a while. The workflow may be affected indefinitely. Business interruption leads to a reduction or complete cessation of production or service. As a result, the turnover you hoped for if the damage had not occurred is reduced or not realized at all. On the other hand, it is inevitable that fixed costs will continue, profit and market share will decrease, and therefore your equity, namely your liquidity will decrease. Another inevitable result is that, as research shows, most of the businesses in which these risks occur, the liquidity difficulty that they fell after the loss led to bankruptcy or downsizing. Profit Loss Insurance is a product designed to protect businesses from these very dangerous risks.
Loss of profit insurance, on the other hand, covers the loss of gross profit arising from the decrease in turnover as a result of the cessation or disruption of commercial activities, provided that it remains within the compensation period, and the increased operating costs to prevent this decrease.

Loss of Profit Insurance:

• Compensates for ongoing costs of operating profit.
• Provides the qualified workforce that will be needed in the critical period after the damage.
• Ensures that your interest obligations are fulfilled during the downtime, and therefore the credibility of your business continues.
• Provides cash flow by paying your profit loss in appropriate installments.
• Finances the studies aimed at reducing the negativities that occur after the damage.
• Eliminates the effects that will occur if your production stops completely after a small fire.
• Creates a financial bridge for your business to reach its pre-damage state. This period varies according to the extent of the damage and the maximum period for the company in question is determined before the insurance.
• In publicly traded companies, provides stability in the stock market.

Loss of Profit Insurance Compensation Coverage:

The business has variable and fixed costs depending on its production activities.
Variable Costs:

• Purchases (raw materials / auxiliary materials, etc.) (with all discounts deducted)
• Packaging and packaging costs
• Transport and freight expenses
• Costs that can be reduced or completely eliminated in proportion to the cessation of work (energy, gas, steam, water, etc.)
• Fees
• Advertising expenditures
• Other variable costs
• If personnel expenses are insured separately from the annual gross profit, they must be insured separately.

Fixed Costs:

These are the costs that are not related to the interruption of the business and that will continue in the event of a interruption and cannot be reduced.

• Worker and/or civil servant wages and bonuses
• Interests
• Rental expenses
• Insurance premiums
• Depreciations
• Maintenance expenses
• Sales and administrative costs
• Research and development expenses
• Other fixed costs

How to Calculate Loss of Profit Insurance Fee?

While calculating the insurance amount in Profit Loss Insurance, the balance sheet and profit/loss information of the previous financial year should be used. In general, the gross profit obtained by the enterprise in the previous financial year is taken as a basis in calculating the insurance value. However, this value should be updated according to the principles stated below.

• The period between the end of the previous financial year and the beginning of the current insurance year,
• Current Insurance Year Budget Accounts,
• Maximum Indemnity Period,
• The expectation of growth in the business volume of the enterprise,
• Inflation rate.