boring but necessary

The AV a software-controlled car. Beyond the traditional  motor insurance, we have to consider it as a product that could function on its own. Hence, some elements of a insurance related to products will be required. In addition, if the AV is used to move goods and provide services, then we have to consider some form of cargo damage, liability and business interruption as well. 

Cybersecurity liability insurance evolved from the family of liability General Insurance (GI) for e.g. Public Liability, Professional Liability, Design Liability etc. that provides cover for non-physical financial losses and liabilities. Since the late 1990s, it has started to include some first party losses but structurally and legally, they remain similar. An example of the cyber insurance cover would be:

Liabilities

• For a security failure, data breach, or loss of privacy data
• Arising from regulatory defense, penalties and fines
• For content injury arising from the publication of media content

Own Losses

• Breach Response Costs for Security Failure or Data Breach
• Crisis Management Costs for Public Relations Event
• Cyber Extortion Expenses
• Data Restoration Costs for Data Assets
• Computer Replacement and Bricking for Computer Hardware
• Direct Business Interruption

Some key exclusions are losses arising from:

• Intentional Acts and Fraud
• Patent Infringement
• Contractual liabilities
• Bodily Injury
• Property Damage
• War and Terrorism

The question of how much business profit one should insure is not an easy one to answer. It would be easy but not advisable for the finance team to pull out the profit number without understanding its definition in the insurance policy. Within the insurance policy, financial terms like revenue, profit etc. may be defined, but other important P&L line items like variable and fixed costs etc. are not mentioned in the Definition clause.

When an incident has happened, the forensic accountant sent in to investigate the financial loss would check if the profit sum insured had been correct such that the claims pay out would only reinstate without overpaying the lost profit. They would also proportionally par down the claims pay out if the profit had not been insured to the correct quantum and premiums.

If you decide to insure your business against profit losses, it is important to calculate the quantum correctly to avoid overpaying premiums or receiving too little claims. Some tips I could share include:

• Do not use past years’ data to forecast the upcoming year when the insurance becomes effective. Instead, study the profit realistically to include seasonality, changes in business environment etc. and estimate the highest level for the year going forward.

• Once that is done, you can run through your P&L items to decide which costs your would like to insure. For costs that will not be incurred during an event, like delivery costs, there is no need to insure them.  For costs that will be proportionally reduced with the (lower) revenue, it would be your decision whether to insure them or not. Once you decide to, you can label them as “fixed costs” whether they are variable, semi-variable or fixed in your books.

• The insurer will out pay out the costs you incurred to reduce the profit losses that they indemnify. They will not pay you any additional cost that exceeds the profit even if it makes business sense for you to absorb these short-term costs like additional services, urgent delivery etc. to keep your customers happy. To get such additional costs covered, you could ask the insurer to charge you some additional premium upfront for this claims wild card.