Spotlight on BI Calculator LMI’s Steve Manning received a very worried phone call just recently to advise that “your BI calculator is broken”…It seems that the Gross Profits output it was producing as the recommended sum insured was too high when compared to a rough calculation done by the broker outside the system. Naturally Steve asked for the data set to be provided and with the help of the LMI Forensics team calculated the Gross Profits via excel spreadsheet. Happily the BI calculator and the spreadsheet produced the same outcome but further investigation was required to identify why this differed significantly from the brokers rough calculation. As it turned out the business trend between the published data ending 30th June 2013 and the inception date of the policy had not been factored in and this was then compounded when the policy period and the 12 month indemnity period adjustments came in to play.  This particular client had experienced strong growth in the prior year and would have been significantly underinsured had the broker not followed the prescriptive process in BI Calculator and identified the anomaly.So why do we need to reflect three periods of adjustment ? The Indemnity under an ISR policy states that the claim shall be calculated on “the amount by which the Turnover during the Indemnity Period shall …… fall short off the Standard Turnover” adjusted to “provide for the trend of the Business” (extract not in full but abbreviated to highlight the issue). Looking at the case in hand the clients Business Activity Statement (BAS report) FY2013 which was used as the starting point for the calculation was for the period 1/7/2012 to 30/6/2013; the FY2014 results had not yet been finalised. The policy inception was 1st August 2014. Using a $10,000,000 FY2013 Gross Profit outturn the two calculations using 20% first year + 10% per annum compound growth thereafter ran as follows: Correct Calculation :  FY 2013 GP $10,000,000 1st adjustment 30/6/13 to 01/08/14 (13 months) 2nd adjustment 01/08/14 to 01/08/15  3rd adjustment 01/08/15 – 01/08/16  13/12 x 20% x $10,000,000 = $12,166,667 12/12 x 10% x $12,166,667 = $13,383,333 12/12 x 10% x $13,383,333 = $14,721,666 Incorrect Calculation :  FY 2013 GP $10,000,000 1st adjustment 01/08/14 to 01/08/15 2nd adjustment 01/08/15 to 01/08/16   12/12 x 10% x $10,000,000 = $11,000,000 12/12/ x 10% x 11,000,000 = $12,100,000  As the ISR policy contains a first dollar average proviso the amount of claim payable would have been reduced by 18% and some $2.5m of uninsured value in the event of a total loss. Thankfully the BI calculator was found to be working correctly, the client was fully insured and the broker’s reputation and professional indemnity policy remain intact. BI Calculator is a subscription based web based service that has no limitation as to the number of scenarios or clients that can be processed. It contains 62 calculation models for 99% of all BI policies available in the Australian market. Calculations can be run by the broker or a link generated so that clients can themselves input the data and finalise their own sums insured. BI Calculator has also been approved by a number of insurers when properly used, to allow for the removal of average in the event of claim. If you would like information on how BI calculator can help you or your client, then contact Steve Manning head of LMI eService in our Melbourne office on 03 – 9835 9900 or if you would like your client to have the benefit of a tailored BI review call Revell Weightman head of LMI Forensics in our Sydney office on (02) 9906 5966. You can also download the e-Book: Mannings Guide to Interruption Insurance if you want to do further reading on the subject or on forward to your client to help explain amongst other things the often confusing subject of “why Accounting Gross Profit does not equal Insurable Gross Profit ?”.