Businesses, both small and large, often face unforeseen challenges and disruptions. These challenges can lead to a significant impact on their financial stability. To mitigate such risks, many businesses opt for insurance coverage, which includes provisions for standard turnover and affected turnover periods.
In this article, we will explore the concepts of standard turnover and affected turnover periods within the context of business insurance.
Before we proceed further, let’s be familiar with the key definitions required to better understand the concept of standard turnover and affected turnover period, especially in relation to business or non-life insurance.
1. Gross Profit: It is the sum achieved by the addition of the net profit and the insured standing charges. It is the financial gain a business generates from its turnover, less any operating expenses.
2. Net Profit: Net Profit represents the actual profit derived from the business's operations after accounting for all expenses and before deducting taxes.
3. Insured Standing Charges: These are the expenses specified in the insurance policy that is covered under the policy.
4. Turnover: Turnover is the total income generated by the business from goods sold and services rendered at its premises.
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Standard Turnover and Affected Turnover Period: An Overview
In business insurance, the terms "standard turnover" and "affected turnover period" are crucial components. These are crucial in the view that they play a pivotal role in determining the coverage and compensation a business will receive in the event of damage, such as property damage, natural disasters like fire, flood, earthquake, and other unforeseen incidents.
1. Standard Turnover: The standard turnover refers to the regular, expected level of income or revenue a business generates over a specified period, typically the twelve months immediately before the date of the damage. It represents the baseline revenue that the business can reasonably anticipate without any unexpected events or disruptions.
Standard Turnover can also be defined as the turnover for the twelve months immediately before the accident date, aligned with the Indemnity Period. Adjustments for Gross Profit Rate, Annual Turnover, and Standard Turnover will be made to account for business trends, variations, or special circumstances that could have affected the business before or after the accident. These adjustments aim to represent the results the business would have achieved if the accident hadn't occurred.
2. Affected Turnover Period: The affected turnover period, also known as the indemnity period, is the duration during which the business's financial results are adversely affected due to the damage. It begins with the occurrence of the damage and ends not later than the number of months specified in the insurance policy.
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Calculation of Compensation
The primary purpose of standard turnover and affected turnover period in business insurance is to calculate the compensation a business is entitled to in the event of a covered loss. The indemnity or compensation amount is determined by the following formulae:
1. Compensation for Reduction in Turnover
a) If the damage results in a reduction in turnover, the compensation is calculated as follows:
b) Compensation is calculated by adding the Rate of Gross Profit to the turnover accumulated during the affected turnover period that falls short of the standard turnover.
2. Compensation for Increase in Cost of Working
In a case when there are additional expenses to avoid or diminish the reduction in turnover due to the damage, the compensation is calculated as follows:
It comes out as the additional expenditure (subject to certain provisions) that is necessary to avoid or reduce the reduction in turnover.
Please note, that there should be no increase in the sum produced by applying the Rate of Gross Profit to the amount of the reduction avoided.
In the Nutshell
Standard turnover and affected turnover period are fundamental concepts in business insurance. They provide a framework for businesses to quantify the impact of unexpected events or damages on their financial stability and plan accordingly. Understanding these concepts is crucial for businesses when purchasing insurance policies, as it helps them determine the appropriate coverage needed to protect their operations and financial health. In the face of unforeseen challenges, having a clear grasp of standard turnover and affected turnover period can make a significant difference in the recovery and resilience of a business.
Frequently Asked Questions (FAQs)
1. What is the Standard Turnover, and why is it important?
The Standard Turnover represents the expected turnover without any damage. It's crucial because the indemnity is based on the difference between the actual turnover during the Indemnity Period and the Standard Turnover.
2. How is the indemnity calculated for the increase in the Cost of Working?
The indemnity for the increase in Cost of Working is determined by the additional expenditure incurred to avoid or diminish the reduction in turnover during the Indemnity Period. It is calculated based on the Rate of Gross Profit.
3. Are there any limitations on the indemnity for the increase in the Cost of Working?
Yes, the indemnity for the increase in Cost of Working should not exceed the amount of reduction in turnover thereby avoided. Additionally, any saved sums in relation to insured standing charges during the Indemnity Period will be subtracted.
4. What happens if the Sum Insured is less than the amount produced by applying the Rate of Gross Profit to the Annual Turnover?
In such cases, the amount payable will be proportionately reduced.
5. What is the Indemnity Period, and why is it significant?
The Indemnity Period is the duration during which the business's results are affected due to damage. It is crucial for calculating the insurance indemnity.
6. Can sales or services conducted elsewhere be included in the turnover during the Indemnity Period?
Yes, any money paid or payable for sales or services conducted elsewhere for the benefit of the business must be considered in calculating the turnover during the Indemnity Period.
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